World Energy Investment 2020 World Energy Investment 2020 Abstract

Abstract

The worldwide economic shock caused by the Covid-19 pandemic is having widespread and often dramatic effects on investments in the energy sector. Based on the latest available data, the International Energy Agency's World Energy Investment 2020 provides a unique and comprehensive perspective on how energy capital flows are being reshaped by the crisis, including full-year estimates for global energy investment in 2020. Now in its fifth edition, the World Energy Investment report is theannual IEA benchmark analysis of investment and financing across all areas of fuel and electricity supply, efficiency, and research and development. In addition to a full review of the 2019 trends that preceded the crisis, this year’s analysis highlights how companies are now reassessing strategies – and investors repricing risks – in response to today’s profound uncertainties and financial strains. The energy industry that emerges from this crisis will be significantly different from the one that came before. The vulnerabilities and implications vary among companies, depending on whether they are investing in fossil fuels or low-carbon technologies, as well as across different countries. The new report assesses which areas are most exposed and which are proving to be more resilient. The analysis also provides crucial insights for governments, investors and other stakeholders on new risks to energy security and sustainability, and what can be done to mitigate them.

Page | 2 IEA. All reserved. rights World Energy Investment 2020 Table of contents

Sectoral trends in energy finance ...... 140

Table of contents Role of institutional investors in energy investment ...... 159

Introduction ...... 4 Sustainable finance and energy investment ...... 172 Overview and key findings ...... 7 R&D and technology innovation ...... 181 Fuel supply ...... 22 Investment in energy R&D ...... 182 Overview and 2020 update ...... 23 Trends in investment for technology innovation ...... 187 Upstream oil and gas investment ...... 38 Annex ...... 197 Midstream and downstream oil and gas investment ...... 45

Biofuels investment ...... 58 Coal supply investment ...... 61 Power sector ...... 66 Overview of power investment ...... 67

Final investment decisions ...... 77

Implications of power investment ...... 85

Trends in renewable power costs and investments ...... 91

Networks and battery storage ...... 97

Energy end use and efficiency ...... 107 Overview of energy efficiency investment trends ...... 108

Trends in end-use markets ...... 113

Energy financing and funding ...... 128

Cross-sector trends in energy finance ...... 129

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Introduction

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Introduction

The worldwide shock caused by the coronavirus (Covid-19) pandemic The effects on energy investment in this scenario come from two has drastically altered the course of the global economy and energy directions. First, spending cuts due to lower aggregate demand and markets. In response, this year’s World Energy Investment (WEI) has reduced earnings; these cuts have been particularly severe in the oil expanded its coverage to integrate the latest data and insights on the industry, where prices have collapsed. Second, the practical unfolding crisis in 2020, in addition to a full review of 2019. disruption to investment activity caused by lockdowns and restrictions on the movement of people and goods. As the International Energy Agency’s (IEA) annual benchmark for tracking energy capital flows, the focus in this report is on investment Our assessment of 2020 trends is based the latest available and financing trends across all areas of energy supply, efficiency, and investment data and announcements by governments and companies, research and development (R&D). Our aim is to provide timely and as of mid-May (including first-quarter company reporting), tracking of authoritative data and analysis to policy makers, investors and other progress with individual projects, interviews with leading industry stakeholders, as well as insights on risks to energy security and figures, and incorporates also the latest insights and analysis from sustainability, and what can be done to mitigate them. across IEA work. Our estimates for 2020 then quantify the possible implications for full-year spending, based on assumptions about the Broadening the scope of the World Energy Investment to include a duration of lockdowns and the shape of the eventual recovery. perspective on 2020 requires a view on the severity and duration of the ongoing public health crisis and economic slowdown, and There is some potential upside to this assessment if medical and recognition of the huge uncertainty that surrounds these factors. The macroeconomic crisis management efforts are more successful than assumptions that underpin this analysis follow those of the IEA Global in our base case, allowing for a more rapid V-shaped economic Energy Review 2020, released in April (IEA, 2020a), which assessed recovery and a more pronounced pickup in investment activity in the energy and emissions trends for the year. latter part of the year. The baseline expectation for 2020 is a widespread global recession By the same token, there is also the distinct possibility of an even caused by prolonged restrictions on mobility and social and economic more profound slump in investment spending, especially in the event activity. With a gradual opening up of economies currently under that a second wave of infections later in the year prompts renewed lockdown, the recovery is U-shaped and accompanied by a substantial restrictions and lockdowns. Whichever ways events unfold, policy permanent loss of economic activity. Global gross domestic product responses – whether targeting energy or the economy at large – will (GDP) is assumed to decline by 6% in 2020, an outlook broadly have a major impact on the outcome. consistent with the International Monetary Fund (IMF) longer outbreak case (IMF, 2020).

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Introduction: The global energy and emissions picture in 2020

The impacts of the Covid-19 crisis on energy demand and emissions much further across the full year than in the first quarter, with reduced provide an essential backdrop to this World Energy Investment report. demand in power and industry applications. The most pertinent elements of this picture are summarised here, and In the electricity sector, demand has been significantly reduced as a described in more detail in the IEA Global Energy Review 2020. result of lockdown measures, with knock-on effects on the power mix. A key insight from the analysis of daily data (through mid-April) is that Electricity demand has been depressed by 20% or more during countries in full lockdown are experiencing an average 25% decline in periods of full lockdown in several countries, as upticks for residential energy demand relative to typical levels and countries in partial demand are far outweighed by reductions in commercial and lockdown an average 18% decline. industrial operations. Demand reductions have lifted the share of renewables in the electricity supply, as their output is largely Oil is bearing the brunt of this shock because of the curtailment in unaffected by demand. Demand has fallen for all other sources of mobility and aviation, which represent nearly 60% of global oil electricity, including coal, gas and nuclear power. demand. At the height of the lockdowns in April, when more than 4 billion people worldwide were subject to some form of confinement, For the year as a whole, output from renewable sources is expected to year-on-year demand for oil was down by around 25 mb/d. For the increase because of low operating costs and preferential access to year as a whole, oil demand could drop by 9 mb/d on average, many power systems. Nuclear power is expected to decline somewhat returning oil consumption to 2012 levels. in response to lower electricity demand. In aggregate, this would mean that low-carbon sources far outstrip coal-fired generation After oil, the fuel most affected by the crisis is set to be coal. Coal globally, extending the lead established in 2019. demand could decline by 8%, not least because electricity demand is estimated at nearly 5% lower over the course of the year. The recovery Global CO2 emissions are expected to decline by 8%, or almost 2.6 Gt, of coal demand for industry and electricity generation in the People’s to the levels of ten years ago. Such a year-on-year reduction would be Republic of China (hereafter, “China”) could offset larger declines the largest ever, six times larger than the previous record reduction of elsewhere. 0.4 Gt in 2009 – caused by the global financial crisis – and twice as large as the combined total of all previous reductions since the end of The impact of the pandemic on gas demand in the first quarter of the World War II. After previous crises, the rebound in emissions has been year was more moderate, at around 2% year-on-year, as gas-based larger than the initial decline. Whether this is the case also on this economies were not strongly affected. But gas demand could fall occasion is largely contingent on what happens to energy investment.

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Overview and key findings

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Energy investment is set to fall by one-fifth in 2020 due to the Covid-19 pandemic

Total global energy investment

20%

2 000

1 500 Energy end use and efficiency USD billion USD (2019)

1 000 Power sector

500

Fuel supply

2017 2018 2019 2020

IEA 2020. All rights reserved. Notes: Investment is measured as the ongoing capital spending in energy supply capacity and, in the case of energy efficiency, the incremental spending on more efficient equipment and goods. The scope and methodology for tracking energy investments is available here. “Fuel supply” includes all investments associated with the production, transformation and provision of solid, liquid and gaseous fuels to consumers; these consist mainly of investments in oil, gas and coal supply, but include also biofuels and other low-carbon fuels. “Power sector” includes the capital spending on all power generation technologies, as well as ongoing investments in grids and storage. “Energy end use and efficiency” includes the investment in efficiency improvements across all end-use sectors, as well as end-use applications for renewable heat.

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Investment activity has been disrupted by lockdowns but also by a sharp fall in revenues, especially for oil

Global end-use spending on energy Change in estimated 2020 investment versus 2019, by sector Energy end use Oil and gas Coal Power sector and efficiency 5 0

-32% -15% -10% -12%

4 -50 Oil USD billion USD (2019) USD trillion USD (2019) 3 -100

Power sector 2 -150

1 -200 Natural gas

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Pre-crisis expectations of modest growth have turned into the largest fall in global energy investment on record

The speed and scale of the fall in energy investment activity in the first Not all of these declines are felt directly by the energy industry. Energy- half of 2020 is without precedent. Many companies reined in spending; related government revenues – especially in the main oil and gas project workers have been confined to their homes; planned investments exporting countries – have been profoundly affected, with knock-on have been delayed, deferred or shelved; and supply chains interrupted. effects on the budgets available to state-owned energy enterprises. At the start of the year, our tracking of company announcements and The revisions to planned spending have been particularly brutal in the investment-related policies suggested that worldwide capital oil and gas sector, where we estimate a year-on-year fall in investment expenditures on energy might edge higher by 2% in 2020. This would in 2020 of around one-third. This has already triggered an increase in have been the highest uptick in global energy investment since 2014. borrowing as well as the likelihood that restrained spending will The spread of the Covid-19 pandemic has upended these expectations, continue well into 2021. and 2020 is now set to see the largest decline in energy investment on The power sector has been less exposed to price volatility, and record, a reduction of one-fifth – or almost USD 400 billion – in capital announced cuts by companies are much lower, but we estimate a fall of spending compared with 2019. 10% in capital spending. In addition, sharp reductions to auto sales and Almost all investment activity has faced some disruption due to construction and industrial activity are set to stall progress in improving lockdowns, whether because of restrictions on the movement of people energy efficiency. or goods, or because the supply of machinery or equipment was Overall, China remains the largest market for investment and a major interrupted. But the larger effects on investment spending in 2020, determinant of global trends; the estimated 12% decline in energy especially in oil, stem from declines in revenues due to lower energy spending in 2020 is muted by the relatively early restart of industrial demand and prices, as well as more uncertain expectations for these activity following strong lockdown measures in the first quarter. The factors in the years ahead. United States sees a larger fall in investment of over 25% because of its Oil (50%) and electricity (a further 38%) were the two largest greater exposure to oil and gas (around half of all US energy investment components of worldwide consumer spending on energy in 2019. is in fossil fuel supply). Europe’s estimated decline is around 17%, with However, we estimate that spending on oil will plummet by more than investments in electricity grids, wind and efficiency holding up better USD 1 trillion in 2020, while power sector revenues drop by than distributed solar PV and oil and gas, which see steep falls. USD 180 billion (with demand and price effects accompanied in many Developing countries, especially those with significant hydrocarbon countries by a rise in non-payment). Among other implications, this industries, see the most dramatic effects of the crisis, as falling would mean an historic switch in 2020 as electricity becomes the revenues pass through more directly to lower funds for investment. largest single element of consumer spending on energy.

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Over the last ten years, power sector spending has been relatively stable compared with the rollercoaster ride for oil and gas

Global investment in energy supply

1 200 Oil and gas supply Power sector

USD billion USD (2019) 800

400

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Fuel supply investments have been hit hardest in 2020 while utility-scale renewable power has been more resilient, but this crisis has touched every part of the energy sector

Energy investment by sector

500

400

USD billion USD (2019) 300

200

100

2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020 Upstream Mid/downstream Coal supply Renewable Fossil fuel Nuclear Electricity Efficiency Renewables for oil and gas oil and gas power power networks transport/heat

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Energy should be in the front line of the world’s push for sustainable development, but the investment data reveal a harsher reality

Energy investment by sector as a share of global GDP Annual change in GDP and energy investment 2.0% 10%

1.5% 0%

1.0% -10%

0.5% -20%

-30% 2014 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Fuel supply Power sector End use and efficiency GDP Energy investment

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The crisis has underscored existing vulnerabilities and created new uncertainties

Investment in fuel supply has fluctuated markedly over the last decade, appear on firmer footing, but also face some revenue risks from shifting with typical cyclical elements common to all commodities overlaid with market demand and price trends. growing structural pressures to reduce emissions and switch to cleaner Overall, ongoing investment in renewable power projects is expected technologies. By contrast, investment in the electricity sector has been to fall by around 10% for the year, less than the decline in fossil fuel more stable, buoyed by its central place in economic development and power. Capacity additions are set to be lower than 2019 as project energy transition strategies, and by growth in electricity demand that completions get pushed back into 2021. Final investment decisions has consistently outpaced overall energy demand. For the fifth year in a (FIDs) for new utility-scale wind and solar projects slowed in the first row, investment in power is set to exceed that in oil and gas supply. quarter of 2020, back to 2017 levels. Distributed solar investments have The cuts in fuel supply investment in 2020 apply to all types of been more dramatically hit by lower consumer spending and resources and company, but a few elements stand out. Some of the lockdowns. most dramatic cuts in the oil and gas sector – in many cases above 50% The crisis is prompting a further 9% decline in estimated global – have been among highly leveraged shale players in the United States, spending on electricity networks, which had already fallen by 7% in for whom the outlook is now bleak (although it is too soon to write off 2019. Alongside a slump in approvals for new large-scale dispatchable shale as a whole). Funds available to some indebted and poorly low-carbon power (the lowest level for hydropower and nuclear this performing national oil companies (NOCs) have also dried up, as decade), stagnant spending on natural gas plants, and a levelling off of governments scramble to make up for acute shortfalls in revenue. battery storage investment in 2019, these trends are clearly misaligned Further downstream, a surge in investment in recent years in refining, with the needs of sustainable and resilient power systems. petrochemicals and liquefied natural gas (LNG) has left each of these There are also some worrying signs in the data for the energy sector as sectors now facing a major overhang of capacity, putting intense a whole. In recent years the share of energy investment in GDP has pressure on margins and pushing back many investment plans and declined and is set to fall to under 2% in 2020 – down from around 3% timelines. Natural declines in upstream fields offer a hedge against in 2014. Economy-wide investment also declined as a share of GDP over overinvestment, but there is no such protection further down the value this period, but the declines in energy have been particularly steep. In chain against demand coming in below expectations. part, this reflects a retreat from the boom years of oil and gas spending In the power sector, the ability of many companies to invest in new in the earlier part of this decade. However, the trend is visible too in the capacity has also been weakened by this crisis. This is particularly true power sector and elsewhere, reflecting the lack of progress in boosting of state-owned enterprises (SOEs) in emerging economies, many of key clean energy technologies at the pace required by rising global which were already under financial stress, as well as equipment needs and the imperative to address climate change. suppliers. Larger renewables-focused utilities in advanced economies

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Even before 2020, investment trends were poorly aligned with the world’s projected needs

Global energy supply investment by sector in 2019 and 2020 compared with annual average investment needs 2025-30 Fuel supply Power sector 1 200

1 000

800

USD billion USD (2019) 600

400

200

2019 2020 Annual Annual 2019 2020 Annual Annual average average average average 2025-30 2025-30 2025-30 2025-30 (STEPS) (SDS) (STEPS) (SDS) Oil supply Gas supply Fossil fuel power Renewable power Coal supply Biofuel and biogas Nuclear Electricity networks IEA 2020. All rights reserved. Notes: STEPS = Stated Policies Scenario; SDS = Sustainable Development Scenario. Electricity networks include also battery storage investment. Projected investment levels are from the World Energy Outlook 2019; the point of comparison is the period from 2025-30 in order to provide an indicative post-recovery benchmark for spending levels.

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Clean energy investment has been relatively resilient in the downturn, but a flat trend of spending since 2015 is far from enough to bring a lasting reduction in emissions

Global investment in clean energy and efficiency and share in total investment

800 40% CCUS

Battery storage

600 35% Energy efficiency USD billion USD (2019) Nuclear

400 30% Renewable power

Renewable transport & heat

200 25% Share of clean energy and efficiency in total (right axis)

20% 2015 2016 2017 2018 2019 2020

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The implications of the current investment slump depend on the speed and sustainability of the world’s economic recovery

The Covid-19 pandemic has brought with it a major fall in demand, consumers, it remains to be seen whether the crisis has fundamentally with high uncertainty over how long it will last. Under these reset views on mobility, tourism, or working and shopping from home. circumstances, with overcapacity in many markets, a cut in new There are questions too about the shape of the post-crisis energy investment becomes a natural and even a necessary market response. industry and its financial strength, strategic orientation and appetite However, the slump in investment may not turn out to be proportional for risk. And finally, there are the economic factors that drive to the demand shock, and the lead times associated with energy investment trends, in particular whether oil prices remain low, and investment projects mean that the impact of today’s cutbacks on how quickly costs for some key clean energy technologies continue to energy supply (or demand, in the case of efficiency) will be felt only come down. after a few years, when the world may be well into a post-recovery A key indicator will be the capital going into clean energy phase. As such, there is a risk that today’s cutbacks lead to future technologies. This has been stable in recent years at around market imbalances, prompting new energy price cycles or volatility. USD 600 billion per year, although unit cost reductions have meant In addition, even before the crisis, the flow of energy investments was that this is associated with a steady increase in actual deployment for misaligned in many ways with the world’s future needs. Market and some technologies such as solar photovoltaic (PV), wind and electric policy signals were not leading to a large-scale reallocation of capital vehicles (EVs). Even though this “clean” spending is set to dip in 2020, to support clean energy transitions. There was a large shortfall in its share in total energy investment is set to rise. However, these investment, notably in the power sector, in many developing investment levels remain far short of what would be required to put economies where access to modern energy is not assured. Although the world on a more sustainable pathway. In the IEA SDS, for example, today’s crisis in some ways represents an opportunity to change spending on renewable power would need to double by the late course, it also has the potential to exacerbate these mismatches and 2020s. take the world further away from achieving its sustainable If, by contrast, the world were to return to anything like its pre-crisis development goals. pathway (as might be expected in the absence of a notable policy The implications in practice will depend on a few key variables. The shift) then a different set of risks come into view. In oil markets, for duration of the disruptions to economic activity and the shape of the example, if investment stays at 2020 levels then this would reduce the recovery are major uncertainties. So too are the policy response to the previously-expected level of supply in 2025 by almost 9 million barrels crisis and, crucially, the extent to which energy investment and a day, creating a clear risk of tighter markets if demand starts to move sustainability concerns are baked into recovery measures. Among back towards its pre-crisis trajectory.

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The respective roles of state versus private investors vary widely in different countries …

The share of state-owned energy investments by sector

100% Advanced economies

80% Developing economies

60%

40%

20%

Total Renewables and Electricity Oil and gas supply Fossil fuel energy efficiency networks generation

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… and those economies most in need of investment have a narrower range of financing options

Today’s crisis will inevitably leave governments and large parts of the Liquidity constraints could well become a lasting risk for investment, corporate sector with larger burdens of debt. Governments are especially in long-term or capital-intensive projects. providing direct and indirect support to keep households and A focus on value and quick delivery, as well as environmental gains, companies afloat, but most energy companies are set to emerge from could provide an opening for some cleaner technologies, especially in this crisis with significantly weaker balance sheets. The natural power where solar PV and wind are not only among the cheapest response to these stresses is for companies to consolidate, sell assets options for new generation, but also have relatively short investment where they can, and reassess investment and employment plans. Some cycles. These investments also make good sense for financial investors: of these effects could endure well beyond 2020. new joint analysis with Imperial College London shows that renewable How this plays out in practice will vary widely in different parts of the power companies in advanced economies have delivered higher equity world, depending on the types of companies investing in energy, the returns over the past decade than those in fossil fuel supply, and fiscal space available to governments, and the broader financial and weathered the storm in 2020 better as well. institutional environment. One of the starkest variations across different However, this does not yet make 2020 a tipping point for attracting geographies is the respective roles of state versus private actors; more investment to clean energy transitions. Renewables generally do detailed analysis in this year’s report reveals that SOEs account for well not yet offer all the characteristics that investors are looking for in terms over half of energy investment in developing economies, but less than of market capitalisation, dividends or overall liquidity. Opportunities for 10% in advanced economies. newer sources of low-cost clean energy finance to enter the mix, SOEs, in the shape of NOCs, have strong roles in global oil and gas e.g. from institutional investors, are still concentrated in Europe and supply investment and an even higher share of output, as their assets North America. Although investments in coal power are down in many tend to have lower development and production costs. They also parts of the world, global approvals of new plants in the first quarter of dominate the picture in many developing economies for investment in 2020 (mainly in China) were at twice the rate seen in 2019, and there is thermal generation and in electricity networks. By contrast, with the a long pipeline of projects under construction. notable exception of hydropower, private actors take the lead The pace of change in the power sector puts it in the vanguard of everywhere in renewables (although many renewable projects rely on energy transitions, but it does not represent the entire energy system - incentives set by governments and sales to state-owned utilities). the share of electricity in final energy consumption is only around 20%. Pathways out of today’s crisis depend heavily on the financial Alongside a rising role for low-carbon electricity, investment in a much sustainability and strategic choices of these SOEs and their host wider range of energy technologies, including energy efficiency and governments. There is a risk that some state actors fall back on familiar low-carbon fuels for industrial heat and long-distance transport, will be levers for economic development, pushing up coal use and emissions. crucial to reduce emissions across the energy system as a whole.

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The crisis is hastening the retirement of some older plants and facilities, but also dampening consumer spending on new and more efficient technologies

Changes to the energy-related capital stock in 2019 and 2020 as a share of total stock in the preceding year

15% Additions and refurbishments Retirements and 10% declines Net change

-5%

-10% 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 Renewable power Fossil fuel power Electricity networks Light-duty vehicles Upstream oil and gas

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Covid-19 is a huge shock to the energy system, but the response also presents an opportunity to steer the energy sector onto a more resilient, secure and sustainable path

Every year, a certain portion of the existing energy-related capital sector this is already visible among refineries and in lower utilisation stock is retired or requires replacement. This applies to a wide range of some coal-fired power plants. of energy-using equipment and infrastructure, including appliances, However, the crisis could slow the pace of change in other areas. A vehicles, buildings, large industrial machinery and power plants. It is reluctance to commit capital to new projects could leave cash- also the case for existing oil and gas fields, which decline over time. constrained governments, companies and households using existing The speed of this turnover is a major determinant of investment flows, assets for longer, delaying the speed with which newer technologies and it varies by sector. A large share of investment in upstream oil and are introduced into the system. Low oil prices and a reluctance to pay gas, for example, goes just to combat declines and keep output higher upfront costs could even usher in a new cycle of cheaper, less- stable, meaning that the upstream is capable of adjusting more efficient vehicles and appliances. This raises the spectre of an energy quickly to fluctuations in demand than other parts of the system characterised by systematic underinvestment in new hydrocarbons supply chain such as refineries or LNG plants. technologies and overreliant instead on its existing capital stock, with all that this implies for emissions. Elsewhere, this rate of renewal serves as an indicator for how quickly newer, more efficient or cleaner technologies can increase their Policy makers have the opportunity to design their responses to the market share, e.g. high-efficiency air conditioners, or EVs or more crisis with these elements in mind, combining economic recovery with fuel-efficient cars. There is no guarantee, however, that new energy and climate goals. They can kick-start consumer spending, for purchases always follow this pattern, as demonstrated by the example by providing incentives to replace old, poorly performing popularity of less-efficient sport utility vehicles (SUVs) in recent years, products with new, more efficient models. Much-needed investment which has more than offset the emissions reductions from higher in electricity networks and storage can ensure that tomorrow’s power sales of EVs. systems remain resilient and reliable even as they are transformed by the rise of clean energy technologies. The way that policy makers The current crisis, and the policy response to it, will influence the rate respond to the crisis today will determine the energy security and of change in the energy-related capital stock. The economic sustainability hazards that the world will face tomorrow. slowdown is putting enormous pressure on some of the more exposed parts of the global economy. A surfeit of productive capacity in some areas, at a time of suppressed demand, is accelerating the closure or idling of low-efficiency parts of the capital stock. Within the energy

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Fuel supply

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Overview and 2020 update

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Planned 2020 investments in upstream oil and gas have been slashed under pressure from the collapse in oil prices and demand

Global upstream oil and gas investment

Investment in nominal terms Investment spending rebased at constant 2019 costs 800 800

-25% adjusted) +5% +2% - +4% 600 -26% 600

-32% USD billion (nominal)

400 USD billion (cost 400

200 200

2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020 IEA 2020. All rights reserved. Note: The right-hand figure adjusts the entire time series using 2019 upstream costs; it therefore strips out the effects of underlying changes in costs over this period.

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Upstream spending in 2020 is set to be down almost one-third from 2019 as the industry scrambles to adjust to an unprecedented shock

Only a few years after the major cuts seen in 2015 and 2016, investment Companies have responded with sharp downward revisions to their in the oil and gas sector was hit with an even greater shock in 2020. 2020 investment. The initial reductions in capital expenditure average Markets, companies and entire economies reeled from the effects of around 25% compared with the plans that had previously been outlined the global crisis caused by the Covid-19 pandemic, and the impacts for the year. In our view, given continued financial stress, practical were felt all along the global hydrocarbon supply chains. difficulties with project implementation and some disruption to supply chains, the likely net result for the global upstream sector is a drop of Oil markets were hit particularly hard. The industry had to react to almost one-third in investment compared with 2019. precipitous declines in oil demand and prices as the pandemic slashed fuel use in the transport sector, aggravated in the early months of the Following the previous oil price fall in 2014, the effect of cuts in capital year by the removal of restraints on supply from the OPEC+ grouping. expenditure were mitigated in practice by declines in upstream costs. As a result, the 40% reduction in nominal spending from 2014 to 2019 Consumers in lockdown cannot take advantage of lower prices, so a turns into a much smaller 12% reduction in upstream activity. However, traditional stabilising element in markets was missing. Instead, the task the scope for further cost reductions today is much more limited, of balancing the market in 2020 fell almost entirely on the supply side. because much of the efficiency gains have already been harvested. As The dramatic extent of the second-quarter declines in oil consumption a result, today’s declines in investment are translating more directly into were well in excess of the industry’s near-term capacity to adapt, even reductions in activity. with the output deal eventually agreed by OPEC+ in April. The cutbacks and financial stress are especially stark among some The crisis has forced some existing production to halt, in part because independent US companies and shale producers, many of which were the economics do not support continued operation but also because a already facing demands from investors to shore up business models rapid build-up of oil stocks saturated available storage capacity in some and improve cash flow before the recent price crash. Some producers – parts of the world, even leading to negative prices at times. For some of shale and other resources – have hedged a portion of 2020 output at producers, there was simply no place for their oil to go. higher prices, but this protection rarely extends far into the future, and Natural gas prices (already low before the crisis) and consumption have the design of some existing hedges has not provided much of a shield also been affected by lockdowns, although not to the same extent as in these extreme market conditions. oil. But oversupplied gas markets are likewise showing signs of strain Reductions in upstream activity have meant renewed strain on the and these pressures could intensify later in the year as gas storage companies that provide services and supplies to the oil and gas facilities, already at record highs, fill up even further. industry. This has been reflected in multiple announcements of layoffs.

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Covid-19 lockdowns have disrupted global oil and gas investment activity and supply chains

Alongside the sharp cuts in capital expenditure, the crisis has also had are affected or because transport (e.g. port facilities) is disrupted. practical implications for investment activity by disrupting existing For example, out of a global total of 28 floating production, investment projects and the supply chains on which they rely. These storage and offloading vessels that were under construction in the effects can be grouped into four broad categories: first quarter of 2020, 22 were being built at shipyards in China, Korea and Singapore, all countries where industrial activity was • Risks to teams living and working together on existing onshore or severely affected. Likewise, the Lombardy region of Italy, which offshore projects. Workers on these facilities typically stay in close was among the first areas of Europe to be locked down, is a major quarters in camps or on rigs, making social distancing almost manufacturing centre for specialised engineering equipment for impossible. Regular rotations of staff also increase the possibilities the oil and gas industry. for infections to spread. Companies have been trying to mitigate these risks with regular health screenings, by limiting the number The current crisis has been an eye-opener for many companies about of people on site and by extending the stays of those who remain. vulnerabilities in their supply chains: in general, local supply chains Even without an outbreak of the infection, the risk-mitigation have proved beneficial, and this could have implications for measures affect the speed at which projects move ahead. investment and procurement strategies in the future.

• Restrictions on movement of personnel. Companies rely on • Delays in licensing rounds, approvals and permitting processes national and international mobility to staff their projects and because of disruptions to the work of the regulatory authorities. provide services, and this has been severely curtailed. This Several countries, including Bangladesh, Brazil, India, Liberia, inevitably creates delays where either the company itself, or the Senegal, South Sudan, Thailand and the United Kingdom, have sending or receiving country, has introduced restrictions on travel, already changed planned licensing round activities. especially when a company is looking to start or ramp up Alongside planned reductions in capital expenditure, these practical investment activity. This has contributed to a raft of announced considerations are delaying start-up or implementation of many project delays: for example, Siccar Point Energy delayed its projects, representing a further downside risk to spending in 2020 as planned sanction date for the Cambo project, located west of activity is pushed back into 2021 (or beyond, in some cases). This is Shetland, to 2021 “given the uncertainty of the global situation, why our estimate for upstream spending is lower than what would be including whether any people, goods and services can be suggested only by company announcements. mobilised”.

• Supply chain disruptions. Production and delivery of material and machinery for projects have been interrupted in some cases because of lockdowns, either because the factories themselves

Page | 26 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Planned upstream spending for 2020 has been cut across the board …

Change in announced spending for 2020 versus initial guidance for the year

Majors National oil companies Others 50 Initial

Revised

USD billion 25 Percentage change

0 0%

-30%

-60% BP Eni Total Shell Repsol Equinor Pioneer Chevron Petrobras Occidental Petrochina Continental ExxonMobil Saudi Aramco Saudi Suncor Energy ConocoPhillips EOG Resources IEA 2020. All rights reserved. Source: IEA tracking of company announcements.

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… while the scope for additional cost reductions is significantly lower than in 2015-16

IEA Global Upstream Investment Cost Index IEA US Shale Upstream Cost Index

160 30%

140 20% 2005=100 120 10% year change - on 100 0% - Year 80 -10%

60 -20%

40 -30%

20 -40%

-50% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

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All spending commitments are undergoing renewed scrutiny, and no company or resource type has proved immune

Companies have a limited number of choices as they adjust their Announcements from independent companies outside North America spending to the fall in the oil price. They can delay or shelve planned vary quite widely but are generally lower, in the 10-25% range. activities, or they can seek to make their activities less costly via Announced cuts by the Majors average more than 25%, with efficiency gains or by pushing contractors to reduce costs (or by ExxonMobil – the Major with by far the largest announced investment reducing their own overheads). spend – making the largest reduction. The pressures on companies may appear similar to those that followed There have been fewer formal announcements made by national oil the last price fall in 2014-15, but in practice the cost-cutting options companies (NOCs), but the precipitous declines in hydrocarbon open to companies today are much more constrained. The investment revenue to the companies and their host governments are working projects that are on the table today are already much leaner and cost- their way through into investment plans. Adnoc and its partners have competitive than they were five years ago, having undergone intense announced the cancellation of major tenders. Saudi Aramco has said screening in the meantime for opportunities to trim excess costs via that it plans to cut capital expenditure by as much as 25% from 2019’s simplified and standardised project designs. USD 33 billion. Likewise, the oilfield services and equipment sector has undergone This appears to be indicative of the overall trend among NOCs: Brazil’s major streamlining over the last few years and there is much less Petrobras and PetroChina have both announced a 30% cut in scope for additional savings this time around. Global upstream costs spending. The retrenchment in some places has been even more are expected to drop by around 5% in 2020, largely because of severe, for example the 50% fall in investment for Algeria’s Sonatrach. anticipated reductions in engineering and project management costs Russian companies are also exposed to the crisis, although investment as well as services, but this is much less than the headline fall in spending has been supported by a devaluation of the rouble (which capital expenditure. Costs in the shale industry are expected to come effectively means a reduction in dollar-denominated costs) and also down by a similar amount, mainly due to oversupply of rigs and by the structure of the tax system, in which the government absorbs pumping equipment, lower anticipated labour costs, and inflation. most of the hit when oil prices fall. The patterns of project delays and cost-cutting are visible across all types of company and all regions, but there are some strong variations in the severity of the measures taken. The largest cuts – in many cases above 50% – have been among the independent North American upstream operators, especially those in shale (see next page).

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The shock has been most severe for some smaller and medium-sized North American operators, although it’s too soon to write the obituary for shale

The latest downturn has been painful across the board, but there are The damage to investor confidence and to available financing will take three parts of the industry that are particularly vulnerable. First, time to repair, but it is too soon to write off shale. Drilling new wells medium-sized and smaller companies in North America – often heavily would naturally require a rebound in prices (for most plays and invested in shale – that had been under financial pressure already operators, well into the USD 40s/bbl), but shale has proven its before the price collapse. Second, weaker NOCs in countries that are resilience in the past and investment can pick up when market heavily reliant on hydrocarbon revenues. And third, the service conditions allow. After a wave of bankruptcies, though, it will be a companies that are bearing the brunt of the cutbacks in capital different industry from the one that we have known until now. expenditure. Some indebted and poorly performing NOCs are also being hit very The shale industry as a whole was struggling to generate significant hard by the current crisis, with knock-on effects on host governments free cash flow at prices above USD 50/bbl (West Texas Intermediate that rely on oil and gas revenue to provide essential services. The [WTI]), so it is no surprise that at oil prices of USD 30/bbl or less, the crisis is playing havoc with reform initiatives, such as Angola’s plans to outlook for many highly leveraged shale companies looks bleak. Some restructure Sonangol and bring in new players to the country’s are already seeking bankruptcy protection, with Whiting Petroleum upstream. The deterioration in asset quality could have ripple effects being the first of the larger producers to do so, and strains will across the banking sector in countries such as Nigeria. In a worst case, intensify for a good portion of the sector (see also the Energy some higher-cost NOCs risk falling into a spiral of lower revenue, Financing and Funding section). We estimate that upstream spending investment and lower output, along the disastrous path that on shale (tight oil and shale gas) is set to decline by 50% year-on-year Venezuela’s PDVSA has followed in recent years. in 2020. Companies providing services and supplies to the oil and gas industry Unlike in 2014-16, today there are few prospects for companies to sell are also facing another very difficult adjustment. Jobs servicing the upstream assets as a way to service debt or raise capital. The fall in shale sector are being hardest hit, but the effects would be widely felt the oil price also means that companies that use reserve-based across the industry. Petrofac, which operates extensively in the Middle lending face a significant revision in their value of available debt. This East, is anticipating a “considerable impact” on demand for its will hit small and medium-sized companies particularly hard (not just services in 2020 and is reducing its own capital expenditure by 40%, in shale). With the possibility of more constrained access to capital in alongside a 20% reduction in staff numbers. the future, one consequence of the current crisis may well be a consolidation of the industry towards larger players with deeper pockets.

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The crisis is widening the near-term gap between capacity additions and demand growth for midstream and downstream infrastructure …

Annual capacity/demand growth for refined products, ethylene and LNG

Refined products Ethylene LNG

3 15 60 metres 2 10 40 cubic Million tonnes Million

1 5 20 Billion Million barrels day per barrels Million

0 0 0

-- 81 -5 -20

-- 92 -10 -40 2015-17 2018 2019 2020 2015-17 2018 2019 2020 2015-17 2018 2019 2020 Gross capacity addition Demand growth

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… raising questions about the “safe havens” of investment in petrochemicals and LNG

In recent years, investment in new refining, petrochemicals and LNG likewise triggering a reassessment of the timelines for some of the capacity had already started to run ahead of near-term growth in planned projects that have not yet started construction. consumption: the effects of the crisis on demand mean that this In both LNG and petrochemicals, uncertainty around the trajectory of problem of overcapacity now looms very large. There are clear demand and prices and the shape of an eventual recovery from the opportunities in all of these sectors, especially given that longer-term economic slowdown are going to weigh heavily on investment demand expectations for plastics and for gas are relatively robust. decisions. By pushing down prices worldwide, the crisis has also – for However, there are risks as well given that these sectors involve large, a while at least – removed the competitive edge afforded to US capital-intensive investments that require high levels of utilisation over exporters by the shale revolution. Spot natural gas prices are hovering time. Unlike the production declines in the upstream, there is no around the short-run marginal costs of US LNG exports, and low oil natural protection against the risk of demand coming in below prices are now erasing the traditional cost advantages that US ethane expectations. crackers have enjoyed versus their naphtha-based counterparts in New LNG project announcements had a record year in 2019, even Asia and Europe. without considering Qatar’s drive to expand its own export capacity. Refiners are coming under huge pressure as well. In normal times, low But these plans have now been jolted by lockdowns, weak gas crude oil prices are not necessarily bad news for refiners. However, demand, and falling oil and natural gas prices. The selection of the plunge in demand really squeezes refinery margins and volumes. contractors and partners for the Qatari projects has been pushed Refiners are responding by cutting run rates and accelerating the yield back; planned projects in North America face delays because of both shift from gasoline, which is hardest hit by the lockdowns, to diesel. local workforce disruption and the closure of Asian fabrication facilities making modules for the plants; and travel restrictions are The Majors and independent refiners are taking a hard look at planned preventing work from scaling up on Mozambique’s first onshore investments and divestments. Many will re-evaluate their existing project. New project announcements, initially anticipated for 2020, portfolios, possibly leading to another wave of closures as some are also being postponed. refineries at the higher end of the cost curve shut down (and then struggle to reopen). This would accelerate the restructuring of the A similar dynamic is visible in the petrochemical industry, where a global refining industry towards regions benefiting either from surge of investment over the past few years (also linked in part to the cheaper inputs, such as the Middle East, or close to still-growing shale revolution) has led to concerns about overcapacity. Prices for demand, such as in developing countries in Asia. The role of NOCs in chemical products were falling already in 2019, and 2020 has put global refining is likely to strengthen as a result. further pressure on the economics of production facilities. This is

Page | 32 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Coal investments may not suffer quite the same volatility as oil in 2020, but low oil prices are bad news for biofuels

Shrinking coal demand, lower prices, environmental pressures and producers, such as Indonesia, where coal supply investments are disruptions to supply chains and investment operations are set to reported to be well below the USD 7.6 billion target set by the bring a substantial decline in coal supply investment in 2020. government for the mining sector in 2020. However, this is not yet the However, the estimated 24% decline compared with 2019 is not quite case in China and India, where large state-owned companies follow as severe as those seen in oil and gas supply. long-term strategies driven by factors such as energy security and local jobs, which are structural considerations beyond the (longer or The main mitigating factor relates to China, which accounts for more shorter) effects of Covid-19. Coal India, the dominant producer in than two-thirds of global spending on new coal supply. An expansion India, reported an all-time high production level in March 2020. in Chinese investment in existing and new mines was the key reason behind a 15% rise in global coal supply investment in 2019. And the The economics of coal supply are helped somewhat by a lower oil gradual resumption of Chinese industrial activity is a key factor price, as oil products represent a significant share of coal mining and limiting our estimated decline in 2020. By early March, more than 80% transportation costs. The share of oil products in coal operating costs of China’s coal mining capacity was already operational, and is technology-dependent, but typically ranges from 5-30%, i.e. a drop investment in existing and new mines has been on a cyclical upswing in oil prices of 30% would translate into a reduction of operating costs after a wave of consolidation and restructuring in 2016-17. between 2-10%. The recovery in coal demand in China for industry and electricity Low oil prices bring renewed uncertainty to the biofuels sector, where generation, after a sharp fall in the first quarter, is offsetting in part capital investments were already at a decade-long low in 2019. In the some profound declines elsewhere. Coal demand in Europe, North absence of strong policy support, the erosion of operating margins America and in some key emerging markets – including India – has may lead to the idling of plants and a further cutback in investment fallen because of lower electricity consumption, the low marginal until conditions improve – a trend already visible in the United States. costs (and priority dispatch) of renewables and rock-bottom prices for In addition, a low oil price environment may undermine natural gas. Overall, the IEA estimates that global coal demand could implementation of biofuel mandates and slow movement towards fall by 8% in 2020 – a higher figure than the 5% anticipated drop in higher blends. electricity consumption. We estimate that investment in new biofuels production capacity will The lower demand outlook is feeding through to the supply side: after take another hit in 2020, well short of the levels implied by existing holding up in the first quarter, prices for thermal coal tumbled in April. policy targets, let alone the amounts that would be required to help

The impacts have been particularly strong in export-oriented meet international climate goals.

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What do the investment cutbacks mean for energy security and emissions?

Effect of lower upstream investment in 2020 on oil and gas balances in 2025

Upstream spending Resulting change in 2025 production estimate, 2020 Oil Natural gas 500 0 0 bcm mb/d

400 -0.5 -20 USD billion

300 -1.0 -40

200 -1.5 -60

100 -2.0 -80

-2.5 -100 Initial New

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The answer depends on how quick and how sustainable the economic recovery proves to be

The downturn means that significant oil and gas resources that would be required in such a scenario. The pickup in conventional project otherwise have been available to the market in the coming years will approvals in 2019 (discussed below) appeared to lessen the chances of not be there. Some of this is deferred, i.e. production that will take a supply crunch, but the decline in investment in 2020 has brought this longer to come to market. Some of it will not come through at all, either possibility back into focus. because new projects are simply shelved or because some existing If, however, the recovery is slower or – from a more positive production is shut in due to the crisis and not restarted. perspective – if efforts to kick-start economies also incorporate policies What does this mean for future supply-demand balances and for energy that accelerate clean energy transitions, then the risks of a future transitions? Already, the decline in investment in 2020 takes an shortfall in oil and gas supply would be significantly lower. Investment estimated 2.1 mb/d away from anticipated oil supply in 2025, and some in hydrocarbons is still required even in the rapid energy transitions 60 billion cubic metres (bcm) off natural gas output. However, if modelled in the SDS, mainly to compensate for declining output at investment were to stay at at 2020 levels for the next five years then existing fields, but by the latter part of the 2020s upstream spending in this would reduce the previously-expected level of oil supply in 2025 by the SDS is already a quarter below the levels in the STEPS. almost 9 mb/d, and bring down natural gas output in that year by some The lasting implications of today’s crisis also depend on the scars that it 240 bcm. leaves on the oil and gas industry. A prolonged period of lower prices Today’s crisis could also lead to small additional losses (primarily for oil) could provoke a profound industry shake-out, with weaker or higher- due to production capacity that is shut-in and not regained. This would cost players forced to the sidelines or out of the business altogether arise because of lower productivity from some tight oil wells that are (unless governments are willing to reduce their own take in order to shut in and then re-started, as well as permanent closure of some older, ensure the viability of domestic players). A more concentrated and risk- low-productivity fields with relatively high operating costs. averse industry could struggle to invest adequately in new supply, given the likelihood of continued fiscal strains in many resource-rich The implications of these reductions in future supply for market countries and potential investor apathy elsewhere. balances are highly uncertain, and depend largely on the shape of the economic recovery from the Covid-19 crisis, and the extent to which From an environmental standpoint, there could be marginal gains from climate and sustainability concerns are baked into that recovery. such a shake-out for the industry’s greenhouse gas profile, as some higher-cost resources are also more emissions-intensive. However, this If the recovery is relatively rapid and the world returns to its pre-crisis crisis also has the potential to squeeze the funding available for demand trajectory, this increases the risk of an eventual tightening of investment by the industry in cleaner energy technologies. markets. Previous analysis in the IEA World Energy Outlook and WEI already highlighted that investment may be falling short of what would

Page | 35 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

The crisis underlines the strategic rationale for oil and gas companies to diversify investments, but also cuts their means to do so

Capital investment by Majors and selected other companies in new projects outside oil and gas supply

2.5 2.5% Biofuels

CCUS

2.0 2.0% Solar PV USD (2019)USD billion Onshore wind

1.5 1.5% Offshore wind

Share of total capital investment (right axis) 1.0 1.0%

0.5 0.5%

2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: Capital investment is measured as the ongoing capital spending in new capacity from when projects start construction and are based on the owner's share of the project. Companies include the Majors and selected others (ADNOC, CNPC, CNOOC, Equinor, Gazprom, Kuwait Petroleum Corporation, Lukoil, Petrobras, Repsol, Rosneft, Saudi Aramco, Sinopec, Sonatrach). CCUS investment is in large-scale facilities; it includes developments by independent oil and gas companies in Canada and China and capital spend undertaken with government funds.

Page | 36 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Companies are set to be more selective about investments – of all types – during a period of high uncertainty

The social and environmental pressures on many oil and gas companies Companies that have made strong pledges to diversify spending and raise complex questions about the role of these fuels in a changing support energy transitions will be wary of breaking these commitments. energy economy and the position of these companies in the societies in Indeed, the current environment should make returns on some low- which they operate. These questions become even more challenging in carbon investments appear more attractive – especially when adjusted the revenue-constrained world of 2020. for risks such as oil price volatility (see Energy Financing and Funding section). Many large oil and gas companies have made specific commitments to diversify spending in favour of lower-emissions technologies and Our monitoring suggests that the flow of investment into low-carbon reduce their emissions. These commitments vary in scope and projects by oil and gas companies has continued into 2020. There was ambition, but a notable recent evolution has been for some emissions- almost USD 1 billion in new investment decisions, all in solar PV, reduction pledges to encompass not just a company’s own operations, announced by subsidiaries of BP, Shell and Total in the first quarter of but also the emissions resulting from the energy that they sell to end the year, plus a large onshore wind project from YPF in Argentina. This consumers, i.e. the combustion emissions from transport fuels, or from is an amount equivalent to around half of the total 2019 spending. In gas used for heat or power. BP’s commitment from February 2020 to addition, Equinor, Shell and Total announced in May a final investment reduce all emissions from the oil and gas that the company produces to decision on the Northern Lights CCUS project, which will take net zero by 2050 is a prominent case in point. captured industrial sources of CO2 and inject them in subsea storage in the North Sea. This implies a massive ramp-up for companies in the share of investment that goes to low-emissions energy, whether that is It is too early to judge whether momentum behind all aspects of electricity or low-carbon fuels. company low-carbon strategies can be maintained. A plausible outcome is that cash-constrained companies will be very selective So far, investment by oil and gas companies outside their core business about their spending, with only the very best projects having the areas has been less than 1% of total capital expenditure, with this chance to move forward. This could favour clean technologies with indicator reaching around 5% for the leading individual companies. The established business models, such as solar PV and onshore and largest outlays have been in solar PV and wind. In addition, some offshore wind. Progress on projects in low-carbon hydrogen, companies have moved into new areas by acquiring existing non-core advanced biofuels or CCUS will depend on supportive policies and businesses, for example in electricity distribution, EV charging and public-private collaborations. batteries.

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Upstream oil and gas investment

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The calm before the storm: while spending on US shale fell back, some companies felt more confident about approving new conventional investments in 2019

Conventional oil and gas resources subject to FIDs, average annual approvals by region Conventional crude oil 5 000 Mb 4 000 3 000 2 000 1 000

2011-14 Middle East C&S America Russia Africa North America Asia Pacific 2015-18 Conventional natural gas 5 000 2019 4 000 Mboe 3 000 2 000 1 000

Middle East C&S America Russia Africa North America Asia Pacific

Page | 39 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Larger-scale project approvals came back in 2019 … and decline rates for some conventional oilfields have slowed

Five largest oil and gas FIDs (of each), by year Decline rates for mature non-OPEC fields

6 000 12% Mbbl

5 000 10% Arctic LNG (Russia)

4 000 8%

Area 1 LNG (Mozambique) 3 000 6%

Berri (Saudi Arabia) 2 000 4% Marjan (Saudi Arabia) 1 000 2%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2000- 2005- 2010- 2015- 04 09 14 19 Natural gas Oil Oil/Natural gas

Source: IEA analysis based on Rystad (2020).

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Developments in 2019 eased concerns about the adequacy of future supply, while events in 2020 could reawaken them

Against the pre-crisis backdrop of robust demand growth, the IEA has indicated a renewed degree of comfort within the industry for larger expressed concern over the implications of a prolonged slump in new project sizes, albeit while retaining the emphasis on short times to conventional oil and gas resource approvals since 2014. In particular market and for simplified and standardised project designs. in the oil market, these approvals had fallen to levels that relied on Another development that eased concerns about the adequacy of continuous rapid growth in US tight oil to pick up the slack and meet future supply (until the 2020 shock) was some evidence that decline rising demand. rates for conventional fields have slowed. This topic was covered in In 2019, however, the balance changed somewhat. Overall upstream detail in the 2018 World Energy Outlook (IEA, 2018); in this follow-up spending was up by 0.6% in real terms (2% in nominal terms, slightly analysis, to avoid any potential impact of market management policies below the guidance provided by companies to the market). The on field production histories, we focused only on non-OPEC fields that growth in investment came from conventional projects rather than have already fallen below 50% of their peak production. from shale, which experienced a decline in spending for the first time The five-year average decline rate of these fields (with fields weighted since 2016 (although not necessarily a decline in output – US tight oil, by their cumulative production) suggests that decline rates have for example, continued to grow by over 1.2 mb/d). dropped by about 0.5 to 1 percentage points in the period since 2015. The volumes of conventional resources subject to FIDs were A key explanation for this drop is that after the oil price fell in 2014, significantly higher in 2019 in the Middle East and the Americas (for companies focused on getting the most out of their brownfield assets oil), due mainly to deepwater plays in Brazil and Guyana. The same rather than taking on major new projects. was true for natural gas in the Middle East, the Russian Federation A small fall in decline rates may not seem very significant. However, (hereafter, “Russia”) and Africa, in many cases related to the rise in around 50% of oil production today comes from post-peak approvals for large LNG projects (see below). conventional crude oilfields. If we were to assume that a 0.5% Successive WEI reports have also noted the strategic shift in recent reduction in decline rates was a structural change across the board, years in favour of smaller, more modular investments with shorter lead then by 2025 production from all post-peak fields would be 1.3 mb/d times. This was a way to limit upfront capital spending, accelerate greater, significantly reducing the amount of investment in new fields paybacks and reduce exposure to long-term risks. However, 2019 saw that would be required to balance the market. The impact of the 2020 some much larger projects being approved, chief among them drop in investment on decline rates will require careful monitoring to Russia’s Arctic LNG, Mozambique’s Area 1 LNG, and the expansion see if these gains are being maintained. plans for the huge Berri and Marjan projects in Saudi Arabia. This

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Distinct divergences in upstream spending across different types of company …

Allocation of upstream investment by resource type and company type

Majors NOCs 100% Shale/tight oil 80% Conventional 60% onshore Shelf 40% Deepwater 20%

2011-14 2015-16 2017-18 2019 2011-14 2015-16 2017-18 2019

Independents – US and Canada Independents – Others 100% 80% 60% 40% 20%

2011-14 2015-16 2017-18 2019 2011-14 2015-16 2017-18 2019

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… reflect variations in access to resources and strategic judgements about the future of hydrocarbons

The allocation of upstream investment spending varies considerably investment opportunities in the Gulf of Mexico and offshore Latin across different types of oil and gas companies. These variations America (notably Brazil and Guyana). reflect the types of resources to which these companies have access, The emphasis on technology leadership among the Majors has been but also the pressures that different companies feel from investors accompanied by a preference for projects that combined cost and societies, as well as different perceptions of future risks. advantages with easily realisable commercial prospects – including There has not been any clear change in recent years in the allocation short lead times and proximity to existing infrastructure. of upstream spending by NOCs; the strategic shift has rather been The Majors’ investment strategies appear to be designed with future towards vertical integration strategies via an expansion of investments uncertainties and transitions in mind, whereas most NOCs are locked in refining and petrochemicals (discussed below). Within the into a more traditional hydrocarbons paradigm. However, although upstream, the tendency has been towards internationalisation of some natural gas features prominently in the Majors’ priorities, there are few NOC operations led by companies such as Equinor, Gazprom, signs in the combined data of a shift towards upstream gas Petronas and the Chinese NOCs, lately joined by others such as investments. The share of gas investment in the early years of the Rosneft and some key companies in the Middle East. The intent has decade was boosted by the large investments made in gas to supply been to seek out new opportunities for growth as well as to acquire LNG export facilities in Australia, but this effect dissipates after 2016. new expertise. However, there is no visible shift in aggregate investment towards “frontier” technology areas such as deepwater or Independent exploration and production companies headquartered in shale. The bulk of spending remains in traditional areas of NOC North America have an even greater exposure to unconventional strength, in resources to which these companies typically enjoy resource types, mostly shale. This has been a vulnerability in today’s preferential access: conventional resources found either onshore or in downturn, and this segment has seen the largest revisions to shallow water. anticipated investment spend in 2020. By contrast, the Majors have undergone a strong shift in their capital Outside North America, though, the allocation of spending by spending over the last decade. The precise direction varies by “independents” is more traditional, albeit with a higher share of deep company, but overall there has been a strong move into shale, which water (thanks to companies such as Galp, Kosmos Energy, and now accounts for one-fifth of total spending, up from less than 5% at specialised operators across Latin America and Africa), and a higher the time of the last oil price crash in 2014, and out of oil sands. share of spending on natural gas.

Deepwater investments have retained a prominent place, reflecting

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After a mild upswing in 2019, exploration is coming under renewed pressure in the downturn

Oil and gas exploration spending has been on a consistent downward The record of discoveries thus far in 2020 is some 40% below the trend in recent years, with only a slight bump in 2019. With investment same period in 2019, although notable finds have included the Jebel budgets under renewed pressure in 2020, the share of exploration Ali gas discovery in the United Arab Emirates, which opens up the spending in total investment may hit historic lows. possibility of reducing the country’s reliance on imported gas, and further finds in the Guyana-Suriname basin. Exploration is being tested by more than a cyclical downturn: many companies and their investors do not attach the same importance to Global conventional resources discoveries and exploration spending reserve replacement as they have in the past, especially given the as % of total upstream investment relative abundance of onshore unconventional resources (for which there is no formal exploration process as such). As a result, while incentives remain for companies to seek out more advantaged 60 30% resources and upgrade their portfolios, there is not the same impetus for companies to explore and discover as there once was. This is 50 25% especially true given that the remaining prospective or underexplored Billon boe areas in the world are increasingly remote or difficult to access. 40 20%

Exploration often finds itself in the firing line when companies are 30 15% looking for ways to cut costs. In our estimate, exploration spend is likely to be down again in 2020, both because of cuts in allocated 20 10% investments and because of practical difficulties in moving personnel and equipment to the desired areas. Planned exploration wells across 10 5% Africa and Latin America could be delayed as a result. That said, 2019 was a moderately successful year for conventional discoveries. The countries that added the most to their conventional 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 resources were Iran, Russia, Guyana, and Trinidad and Tobago, and there were also significant discoveries in China, Malaysia, Indonesia, Oil discoveries Gas discoveries Exploration spending (right(rhs) axis) Norway and South Africa . This made 2019 the most successful year for oil and gas discoveries since 2015. The trend in discoveries is IEA 2020. All rights reserved. towards natural gas, and 2019 was another significant year with large Source: IEA analysis based on Rystad (2020). finds in Russia, Mauritania, Iran and Cyprus.

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Midstream and downstream oil and gas investment

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Refining: A surge in investment in recent years resulted in more than 2 mb/d of new refining capacity coming online in 2019 – the highest level since 2010

Investment in oil refineries (greenfield and upgrades) by region Regional distribution of oil refineries

60 3.0 100% North America mb/d 50 2.5 Central and South

USD billion America 80%

Africa 40 2.0 60% Europe/Eurasia 30 1.5

Other Asia Pacific 40% 20 1.0 China 20% 10 0.5 Middle East

2015 2016 2017 2018 2019 Annual gross In operation Recently Under capacity addition added construction (right axis) (2015-19) IEA 2020. All rights reserved. Notes: The figures reflect estimates of ongoing capital expenditures over time and do not include maintenance capex. Gross capacity addition includes crude distillation units and condensate splitters.

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Countries adding refining capacity also strengthened their positions as oil product exporters, adding to the competitive pressures facing refineries elsewhere

Share of refining capacity addition Gross refined products exports of top countries by country, 2013-18 12 Korea mb/d 10 United States Rest of world UAE 19% China 31% 8 Russia Korea 2%

United States 6 India 7% Saudi Arabia UAE 4 9% Saudi Arabia China Russia 14% 2 9% India 9%

2013 2014 2015 2016 2017 2018 IEA 2020. All rights reserved. Notes: UAE = United Arab Emirates. Refined products include gasoline, diesel/gasoil, kerosene and fuel oil. Source: JODI (2020) (for refined products exports).

Page | 47 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Recent investment trends are creating a major overhang in refining capacity that will reshape the industry

Refining investments have surged since 2015. Spending on new several countries are emerging as major oil product exporters in refinery builds and upgrades amounted to some USD 52 billion in 2019 addition to their traditional role as major crude oil exporters. Many (USD 75 billion if maintenance spending is included). Several years of Middle East NOCs have also set up trading arms to expand their heightened investment led to a record amount of new refining capacity presence in crude and product trading. (2.2 mb/d) coming online in 2019, including two mega refineries in In Asia, while the main motivation is to serve growing demand in China integrated with petrochemical operations (400 kb/d Hengli and domestic and adjacent markets, capacity is growing faster than 400 kb/d Zhejiang phase 1). demand in certain countries, notably in China. Product exports from Capacity additions of 2.2 mb/d in 2019 were significantly above the some of these countries have also risen, putting additional pressure on annual increase in oil demand of 0.8 mb/d. A further host of new less advantaged refineries in other parts of the world. refinery units (around 6 mb/d) is planned for the next five years (IEA, For example, some 2 mb/d of refineries in Japan and Europe have shut 2020b). Even before the health and economic crisis of 2020, it was down their facilities since 2013. Several European plants have been clear that these new refinery additions would be likely to outpace the converted to bio-refineries (e.g. Total’s La Mede, Eni’s Venice and Gela), rise in demand. which also serve EU biofuels policy targets (see below). Brazil’s Recent investment activities have been concentrated in regions with Petrobras has scrapped the second phase of the Comperj megaproject structural advantages, either cheap feedstock (e.g. the Middle East) or and has instead kick-started the process of divesting its refineries as growing demand in domestic markets (e.g. developing Asia). The part of its portfolio optimisation programme. Middle East and developing economies in Asia account for less than The sentiment towards refining investment varies by company type. 40% of today’s operating refineries, but have recently been attracting NOCs in the Middle East and developing Asia have been active in considerable investment; the two regions account for two-thirds of all strengthening their presence in the downstream value chain. NOCs refineries that have come online over the past five years, and over 80% own around 30% of the refineries in operation today, but hold a 46% of those currently under construction. share of those under construction. On the contrary, Majors have been Investments in the Middle East have been driven by the strategic selective in refining investment in recent years. Independent ambition to extract more value from the region’s hydrocarbon companies have remained an important actor in new refining resources, with Saudi Arabia, the United Arab Emirates and Iran taking investment in China, Russia and the United States, but their the lead. Kuwait plans to follow suit with the completion of the 615 kb/d involvement is shrinking in recent investment decisions. All of these

Al-Zour refinery, the largest in the region. With these new additions, strategic trends are likely to be reinforced as a result of the 2020 crisis.

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Petrochemicals: An investment boom has been driven by higher industry margins, US shale production growth and optimism about future demand

Investment in petrochemical plants by region Composition of petrochemical investment by type

25 100% MTO Rest of world

CTO USD billion 20 80% North America

PDH

15 Europe/Eurasia 60% Steam cracker Other Asia Pacific 10 40% Other cracker

China Naphtha 5 20% cracker

Middle East Ethane cracker

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

IEA 2020. All rights reserved. Notes: The figures reflect estimates of ongoing capital expenditures over time and do not include maintenance capex. The scope of investment includes steam crackers, propane dehydrogenation (PDH), coal-to-olefin (CTO) and methanol-to-olefin (MTO) units. “Other cracker” includes steam crackers using off-gas, liquefied petroleum gas (LPG) or gasoil.

Page | 49 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Petrochemical investment has shifted towards steam crackers, increasingly integrated with refinery operations

Since 2014, some USD 120 billion has been invested in building new also came online in China, Korea, Malaysia and the Middle East. Strong petrochemical capacity or expanding existing plants. More than 70% demand growth in emerging markets and healthy industry margins of this investment took place in just two countries, China and the partly drove these investments, but robust prospects for demand United States. growth and companies’ strategic intentions to secure a long-term competitive edge also played a major role. There was a noticeable shift in investment in recent years. Until around 2015, most investments were in a series of coal-to-olefin (CTO) For many oil companies, refiners in particular, expansion into and methanol-to-olefin (MTO) facilities in China. These were petrochemicals was seen as a strategic hedge against weak demand accompanied by propane dehydrogenation (PDH) plants to capture growth for transport fuels. More than three-quarters of naphtha market opportunities to supply propylene using low-priced LPG crackers that came online in 2018 and 2019 were integrated with feedstock. refineries to some degree, a dramatic jump from around 10% for those that came into operation in the mid-2010s. Most of the planned However, MTO investment in China fell back as the rise in imported naphtha cracking capacity addition is also expected to have some methanol prices damaged project economics. CTO investment degree of integration with refineries. continued, partly helped by lower coal prices, but at a slower pace than before. Instead, the balance of global petrochemical investment Feedstock flexibility is another feature of recent investments. After shifted towards steam crackers, as investment decisions started to witnessing volatile price movements of different feedstocks, several respond to the shale boom in the United States. companies invested in retrofitting their naphtha crackers to be able to process a higher portion of lighter feedstocks (primarily LPG). The United States has added more than 7 Mt of ethane crackers since Additionally, many planned crackers are coming with an enhanced 2015 with more capacity set to come online in the next few years. With ability to select their optimal feedstock mix depending on market limited domestic outlets and competitive feedstock costs, the country conditions (therefore often being called “mixed feed crackers”). is building several terminals to export ethylene and is poised to establish a strong foothold in global petrochemical markets (although the plunge in oil prices in 2020 is undermining their cost advantages). The United States has accounted for around 40% of global steam cracker capacity addition in recent years, but was not the only country to make a move in this direction. A number of new naphtha crackers

Page | 50 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Ethylene additions were already outpacing growth in demand in 2018-19, with even more new capacity scheduled to start in 2020

Annual ethylene capacity/demand growth and regional price developments 15 1 500 Annual capacity addition

Annual demand growth 12 1 200 USD/tonne

Million tonnes Million Ethylene prices (right axis)

9 900 Asia

Europe 6 600 North America

3 300

- 3 2015 2016 2017 2018 2019 2020

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Companies and investors are trying to respond to growing consumer awareness and regulatory pressure on plastic waste

Investments in alternative feedstock and plastic recycling start-ups

1 000 Plastic recycling

CO feedstock

USD million 800 Bioplastics₂

Other biochemicals

600

400

200

2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: “Other biochemical” include agrichemicals, specialty chemicals and pharmaceutical applications derived from biomass feedstock, but do not include biofuels. Investments include grant, equity investment (at various stages), structured loan and private investment in public equity. Sources: IEA analysis based on Cleantech Group (2020), i3 database.

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The petrochemical investment boom implies lower margins and utilisation in the coming years despite relatively robust long-term demand prospects

As in the refining sector, the pace of investment in petrochemical step, single-use plastic bags will be banned in major cities by the end facilities in recent years has moved well ahead of the rate of demand of 2020 and in all cities and towns by 2022. growth. In 2019, for example, the annual increase in global ethylene While these measures are unlikely to make a strong dent in demand in production capacity was 60% higher than the level of demand growth, the short term, they encapsulate some longer-term commercial and which led to a significant drop in ethylene prices across the board. reputational risks facing chemical companies. And these companies Earnings of many commodity chemical companies fell sharply, by and investors are responding to the widespread social demand for 60-80%, compared with 2018. sustainability by exploring new business opportunities in this area. This mismatch extends out into the future and could be exacerbated Investments in alternative feedstock and plastic recycling start-ups by the economic slowdown caused by the Covid-19 pandemic. In are still relatively small (less than USD 1 billion in total), but they almost 2020, some 12 Mt of new ethylene capacity are expected to come quadrupled between 2017 and 2019. online, the largest capacity addition since 2010, if all projects go Biochemicals (including bioplastics) attracted a large portion of the ahead as scheduled. These additions coincide with a significant capital, but plastic recycling is also receiving growing attention. The deterioration in trade and industrial activity, which may weaken the latter includes both mechanical recycling (e.g. robotics to allow more demand outlook for chemical products. While demand for efficient sorting and picking) as well as chemical recycling, where petrochemicals remains robust in the longer term in the IEA World plastic waste is broken down into monomers or feedstock to allow a Energy Outlook, a confluence of weakened economic outlook and wider range of waste to be recycled. Several pilot plants are being overcapacity casts clouds over industry margins and utilisation rates built to test the technical and commercial viability of chemical in the coming years. recycling processes. Companies’ engagements in these areas are Petrochemical producers are also facing headwinds from a growing likely to expand as they strive to find a new competitive edge amid backlash against plastic waste, reflected in pledges by manufacturers growing consumer awareness and tighter regulations on plastic of consumer goods to reduce the use of plastics in their products and waste. boost the use of recycled material, and in the increasing number of government policy targets and plans to ban single-use plastics. These commitments are also now extending beyond countries in the Organisation for Economic Co-operation and Development (OECD): China, one of the world’s largest plastic consumers, announced its ambition to phase out single-use plastics across the country. As a first

Page | 53 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

LNG: 2019 was a record year for new project announcements …

Sanctioned LNG capacity by year of announced FID Investment in new LNG capacity (sanctioned projects plus Qatari expansion plans)

100 40 800

80 30 600 bcm year per bcm year per

60 USD (2019) billion 20 400 40

10 200 20 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2020*

Europe Russia North America Middle East Africa Others Australia Cumulative capacity (right axis)

IEA 2020. All rights reserved. * Year to date: no new LNG capacity has yet been approved in 2020. Qatar’s LNG expansion is not included in the “sanctioned LNG capacity”, as no formal decisions have been taken, but anticipated spending is nonetheless included in the “project investment” chart.

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… with Qatar also planning a major expansion of low-cost capacity

As noted in the previous section, there was a rebound in the average around 8 Mtpa of capacity), then a fourth was added to the plans and, size of oil and gas projects approved for development in 2019. No in 2019, a fifth and sixth. The target date to complete this expansion is sector demonstrated this newfound comfort with large-scale 2027, by which time these six trains would bring Qatar’s total investments better than LNG, which had a record year for new liquefaction capacity to 126 Mtpa (roughly 170 bcm/y), up from projects. 77 Mtpa (105 bcm/y) today. A drought in new project announcements that started in 2016 was The wave of interest in LNG reflected the relative abundance of broken in October 2018 by the approval of the LNG Canada project, natural gas in the world – especially after the shale revolution – as well followed by the smaller Greater Tortue Ahmeyim project that straddles as a view among investors that this type of investment is relatively the border between Mauritania and Senegal in West Africa. The resilient to more ambitious climate scenarios. Majors such as Shell, BP momentum continued with a slew of announcements in 2019. Almost and Total have increased the share of natural gas in their portfolios 100 bcm/y of new liquefaction capacity was sanctioned over the over the past decade, and have made several large-scale strategic course of the year, more than the preceding four years combined. investments across the natural gas supply chain, particularly in LNG. The rise of the “portfolio” marketing model has also marked a change The United States has been the largest presence in the latest in the way LNG projects are financed, with large, well-capitalised investment cycle, and 2019 approvals included Golden Pass LNG players willing to use their balance sheets instead of relying entirely (Qatar Petroleum and ExxonMobil), train 6 of Cheniere’s Sabine Pass on long-term contracts with committed buyers to move projects and the Calcasieu Pass facility (Venture Global LNG). ahead. There were also major announcements from Mozambique, with This disconnect between LNG investment decisions and firmly approval of the Area 1 LNG project (this Anadarko-led project was then committed demand has taken place against an emerging backdrop of acquired by Total), and from Russia as Novatek’s Arctic LNG 2 project oversupply and downward pressure on gas prices. It now coincides got the go-ahead. Nigeria’s long-awaited seventh NLNG train was also with a profound shock to gas consumption resulting from the global approved in late 2019. health and economic crisis in 2020. Although not yet accompanied by formal investment decisions, the

LNG expansion plans of Qatar Petroleum have been a very prominent part of the emerging picture. Since announcing its intention in 2017 to continue development of the huge low-cost North Field, Qatar has steadily upgraded its ambitions to increase the country’s liquefaction capacity. The initial intention was to add three LNG trains (each of

Page | 55 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

An oversupplied gas market now casts a shadow over the new wave of LNG investments …

Natural gas price ranges for oil-indexed supply (Q1/Q3 2020), current spot prices and US LNG economics (Q1 2020)

12 USD/Mbtu 9

USD 60/bbl, USD 25/bbl, Asia Europe Short-run cost Long-run cost price range price range in Q1 2020 by Q3 2020 Oil-indexed prices Spot prices (Q1 2020) US LNG economics (Q1 2020) IEA 2020. All rights reserved. Notes: Oil-indexed prices are a range based on contractual “slopes” that dictate the strength of the oil/gas price link. Prices in Q3 2020 assume Brent averages USD 25/bbl from March-September 2020. Spot prices for Asia are an average of reported spot prices for LNG deliveries, and for Europe are the day-ahead prices quoted on the Netherlands’ Title Transfer Facility (TTF). The ranges for short-run costs of US LNG reflect the tolling model for LNG off- takers = Henry Hub price (range in Q1 2020) + 15% + shipping costs to Europe or Asia (excluding regasification). Long-run costs include the capital costs of the liquefaction facility.

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… playing havoc with development schedules and near-term commercial prospects

The record year for new LNG project approvals in 2019 took place at a supply emerging in the mid-2020s that could be plugged by time when prices were falling in all major gas-consuming regions. By projects taking FID in 2019. the first quarter of 2020, spot prices for LNG cargoes had fallen into • A larger share of new projects were sanctioned through equity the range of USD 2/MBtu-USD 4/MBtu, enough to cover operating lifting, where project partners receive a share of LNG volumes costs in most cases but well below the levels required for projects to proportionate to their equity stake and take on their own return their invested capital. marketing and selling responsibilities. This contrasts with This was a consequence of subdued demand at a time when traditional project finance structures, which require buyers significant amounts of new supply, including both LNG and pipeline agreeing to purchase a minimum quantity of LNG under long-term capacity, were coming online. Among the pipeline projects, the delivery commitments. largest was the new 38 bcm/y “Power of Siberia” connection between • Strategic considerations for some of the world’s major resource- Russia and China that was launched in December 2019. holders. In the case of Qatar, a drive to ensure the country’s Some LNG suppliers were immediately been exposed to both volume pre-eminence in the LNG market, based on some of the lowest- and price risk because of the crisis. Others have had a measure of cost gas in the world. For Russia, a desire to increase the range of protection because volumes were specified in long-term sales export destinations and balance reliance on pipeline exports. In agreements, with prices often linked in part or in full to oil. However, other cases, a strategic calculation – perhaps reinforced by the the collapse in the oil price in 2020 means that the latter protection is possibility of intensified action on climate change – that the risks set to disappear over the typical six- to nine-month period in which of going ahead early were less than the risks of delay. movements in oil prices filter through into natural gas contract prices. However, the opportunities for the next wave of planned LNG projects The precise implications will vary from company to company. But oil are now much less clear; near-term oversupply and price uncertainty at USD 25/bbl would leave more international gas suppliers struggling have reduced readiness among buyers to conclude long-term deals, to cover their operating costs. and the economic challenges resulting from low prices have severely This disparity between short-term market conditions and the constrained capital budgets among developers, leading to deferrals readiness to sanction new LNG projects can be explained by a number and project reviews. FIDs have been postponed by US and Canadian of factors: independents (Tellurian’s Driftwood and Pacific Oil and Gas’ Woodfibre) as well as oil majors (ExxonMobil’s Rovuma project in • A widely shared anticipation of longer-term demand growth for Mozambique), while Shell backed out of the Lake Charles LNG project LNG and an awareness that, in part because of the dearth of new

in the United States). project approvals in 2016-18, there was a potential shortfall in

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Biofuels investment

Page | 58 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

Biofuels investment fell to its lowest level in a decade in 2019

Investment in biofuel production capacity

60 12%

50 10%

40 8% USD billion USD (2019)

30 6%

20 4%

10 2%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 STEPS SDSSDS Annual avg. Liquid biofuels Biogas Biomethane Share in fuel supply investment (right axis) 2025-30

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Policy support remains the key determinant for investment in new biofuels capacity

Global biofuels investment – including liquid biofuels, biogas and One reason for slower momentum behind liquid biofuels in the US biomethane – has fallen to under 1% of the total investment in fuel market is the “blend wall” effect, which refers to structural challenges supply. Since the late 2000s, when biofuels enjoyed much more relating to vehicle suitability and fuel distribution infrastructure for widespread policy support and rapid market expansion, the amount ethanol blends higher than 10%. A regulatory reform permitting year- invested in new production facilities has dropped substantially. While round sales of a 15% ethanol blend (E15), introduced in 2019, could investment in biogas has been relatively stable, spending on new increase ethanol penetration in the United States. However, only production facilities for liquid biofuels fell sharply over this period. around 1% of service stations offer E15 nationally, and expanding supplies to the approximately 20 states where the blend is not In 2019, investments in liquid biofuels production capacity declined currently available will take time. again by around 30%, largely due to developments in China, where investment in ethanol production facilities halved compared with the Instead, future developments are likely to be led by Asia, where previous year. China has suspended the extension of its 10% ethanol several economies have announced ambitious blending targets, for blending mandate nationwide to reduce competition for corn example, India with a 20% share of ethanol in gasoline (E20) by 2030 production and assure food security. As 10% blending is still and Indonesia with a 30% share of biodiesel in diesel (B30) in 2020. extending to some new provinces, investment in China could rebound The investment required to meet these targets is a key reason for somewhat in 2020, supported by new plants that are already under higher projected spending in the IEA STEPS. construction. Investment in biogas and biomethane has averaged around Policy-driven investment in ethanol production facilities continued in USD 5 billion per year over the last decade, which is less than what the the United States and Brazil. The Renewable Fuel Standard (RFS2) is natural gas industry typically spends every week. The development of the key federal policy mechanism supporting US biofuel consumption. biogas has been uneven across the world, as it depends not only on In Brazil growth is driven by the new Renovabio scheme. However, the availability of feedstocks but also on policies that encourage its shut-ins of biofuel production capacity in the United States and Brazil production and use. China, Europe and the United States account for in 2020, due to plummeting gasoline demand, are likely to dampen almost 90% of global production of low-carbon gases. near-term appetite for new investments. To meet sustainability goals, biofuels investment would need to Continued investment in biodiesel facilities in 2019 was driven almost increase by more than six times over the next decade, reinforcing the entirely by hydrotreated vegetable oil (HVO) plants in Europe and the importance of policy support to scale up sustainable biofuel United States. Policy support for HVO is coming from Europe’s deployment, especially during a period of low oil prices. updated Renewable Energy Directive for 2021-30 and in the United States from the RFS2 and California’s Low Carbon Fuel Standard.

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Coal supply investment

Page | 61 IEA. All reserved. rights World Energy Investment 2020 Fuel supply

China was instrumental in a 15% increase in global coal supply investment in 2019

Coal supply investment

70 2017

60 2018

2019 50 USD billion USD (2019)

China India Australia Rest of the world

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Despite the intensifying debate about the future of coal, global spending on coal supply increased to USD 90 billion in 2019, up from USD 80 billion the year before

Investment in coal supply was around USD 90 billion in 2019, a 15% safety records, leaving the sector more efficient, more profitable and increase on 2018. Even with this rise, this is only around 5% of total safer. investment in the energy sector, despite coal supplying more than a The restructuring coincided with a stabilisation in Chinese coal demand quarter of the world’s global primary energy. The overall figure includes trends after three years of decline from 2014-16, due to strong investment in mining and related infrastructure to bring coal to market, electricity consumption and renewed support for infrastructure but excludes spending on coal-fired power plants. development. As a result, investments in coal supply have picked up China was by far the largest driver of growth in global coal investment again, with the capital not just going to existing mines or those that are in 2019, with some contribution also from Australia and others. This under development, but also to new projects. reflects the increasing concentration of global coal demand in Asia, After a two-year halt, the National Energy Administration and the contrasting sharply with the dramatic reductions seen in some other National Development and Reform Commission1 restarted the process parts of the world. As recently as 2000, Europe and North America of approval for new mines, accounting for 28 Mtpa of additional accounted for one-third of global production; now that share has capacity in 2017, 68 Mtpa in 2018 and 201 Mtpa in 2019. This is not yet collapsed to less than 15%. at the scale of the previous spike in coal supply investment, which at its Understanding China is the key to understanding coal markets. China height in 2012 meant that China was investing 50% more than would represents more than half of global coal demand and almost half of have been needed to meet demand: the Chinese authorities are very global production, and remains the largest importer in the world. China wary of creating a new overhang in capacity, although that risk has also accounts for more than two-thirds of global spending on coal clearly increased due to the effects of the Covid-19 pandemic. supply and for the bulk of global annual changes. Unlike in the previous boom, new investments in coal supply are no The landscape for investment in coal supply in China has been longer banking on an increase in Chinese consumption. But they are reshaped by the reforms of 2016-17 that aimed to address a large predicated on a stable outlook for Chinese coal use, i.e. without any overhang of capacity, which had in turn been created by an earlier sudden intensification of China’s energy diversification or emissions investment boom in the early 2010s. These reforms resulted in the policies, or lasting effects of the current slowdown. closure of many smaller, less productive mines, often ones with poor

1 Mines below 1.2 Mtpa of capacity are approved by the local authorities.

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Social and investor pressures are having an impact, but coal investments still respond to economic signals

Year-on-year change in coal investment in Australia versus movement in coal prices (for the previous year)

60% Price (previous year) Investment 40%

USD billion USD (2019) 20%

-20%

-40%

-60% 2011 2012 2013 2014 2015 2016 2017 2018 2019

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Risks to coal supply projects are growing, but coal prices remain a key driver of investment

The growth in coal supply investment in 2019 can appear global energy mix after oil and the second-largest traded bulk counter-intuitive from an energy market perspective – not least commodity after iron ore. Investments are being proposed on that because global coal-fired power generation saw its largest-ever drop basis, in response to economic signals coming from the coal market. in the course of the year and came under renewed pressure in 2020. Climate-related pressures are visibly affecting some projects and This trend is even more counter-intuitive when viewed against the shaping the demand outlook for coal in many countries, creating backdrop of energy transitions and uncertainties over the future of significant risks to coal investment, especially for thermal coal and coal demand, a groundswell of public opposition to coal projects, and lignite (coking coal is less affected, given the more difficult an increasing number of governments, international financial substitution of coal in steel making). However, the overall pattern is institutions, investors, insurance companies and other stakeholders that coal supply investment still follows typical commodity (boom and limiting or curtailing their involvement in the coal business. bust) cycles, in which high prices tend to lead to overinvestment, The IEA World Energy Outlook 2019 looked in detail at the impact of which creates oversupply and hence low prices, which in turn financing restrictions on coal supply projects. These are becoming discourages investment until shortages push up prices again. more widespread and in many countries the process of gaining This dynamic comes through clearly when viewing recent changes in approval and finance for new coal supply investments is getting coal supply investment in Australia against prices in the preceding harder and longer. In particular, projects that cannot be financed from year.2 We select Australia because it is the largest exporter by the balance sheets of larger companies can struggle. More restricted economic value and has very accessible and transparent data for both access to capital is one reason some larger supply projects prices and investments. Data for 2011-19 show that changes in (e.g. Carmichael in Australia, the Boikarabelo mine in South Africa) spending are well aligned with the price signals from the preceding have been downsized. These trends are also apparent for new coal period. This suggests that the decline in investment in the 2013-16 power projects, as described in the Energy Financing and Funding period was price-driven rather than policy-driven, and that economic section of this year’s WEI. factors remain a key explanatory variable for investment in coal At the same time, some new projects continue to move ahead – supply. On this basis, downward pressure on the coal price in 2020 is notably in China and India, which are the main countries investing in likely to be a primary factor affecting investment decisions in 2021. coal supply. Coal still represents more than one-third of global electricity generation and remains the second-largest fuel in the

2 Price is for thermal price (Newcastle free-on-board 6 000 kcal/kg) and investments also include coking coal. Prices for the preceding year are used to reflect a typical decision-making cycle: companies usually decide the investment one year before the spending occurs.

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Power sector

Page | 66 IEA. All reserved. rights World Energy Investment 2020 Power sector

Overview of power investment

Page | 67 IEA. All reserved. rights World Energy Investment 2020 Power sector

Following a small decrease in 2019, global power investment is set to fall to its lowest level in over a decade in 2020

Global investment in the power sector by technology

1 000 100% Battery storage

- 10% vs 2019 Electricity networks 800 80% Renewable power

Nuclear USD billion USD (2019)

600 60% Fossil fuel power

Share of global investment of global Share Developing economies (right axis) 400 40%

200 20%

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Reversing expectations of an uptick in spending in 2020, all parts of the power sector are set to be affected by mobility restrictions, delays in project development and lower demand

Global investment in the power sector by technology

200 2017 2018 2019 150 2020 USD billion USD (2019)

100

Distribution Transmission Coal Gas Nuclear Solar PV Wind Hydro Battery power power storage IEA 2020. All rights reserved. Notes: Gas-fired generation investment includes large-scale plants as well as small-scale generating sets and engines. Hydropower includes pumped hydro storage.

Source: IEA analysis with calculations for solar PV, wind and hydropower based on costs from IRENA (2020).

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While optimistic views on spending plans by some large utilities provide support for investment, this may not fully offset growing risks and uncertainties in a number of markets

Capital expenditures in 2019 compared with spending guidance for 2020 of selected utilities

80 2019 2020

USD billion Revision 60 announced after Covid-19 outbreak

US utilities European utilities State Grid (~16% of country's capex) (~32% of regional capex) Corporation of China IEA 2020. All rights reserved. Notes: US utilities include: Duke Energy, Southern Company, Sempra Energy, Nextera, Exelon, American Electricity Power (AEP), Edison International; European utilities include: Electricité de France (EDF), Enel, Engie, Energias de Portugal (EDP), RWE Group, Terna. Ratio of utilities’ installed capacity / region’s installed capacity is based on capacity owned by selected utilities (according to companies’ websites) and regional installed capacity based on IEA (2019b).

Sources: Thomson Reuters Eikon (2020) and company announcements as of mid-May 2020.

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The drop in investment across different parts of the power sector varies by technology…

Overall power investment around the world is set to decline in 2020 by revenues. However, investment in new renewables capacity is affected an estimated 10% as a result of the Covid-19 pandemic. This marks a as lockdowns and mobility restrictions affect production, shipping and dramatic break from the situation at the start of the year, when construction schedules, as well as shifting demand expections and company expectations, capital expenditure planning and ongoing policy and procurement measures. We estimate an overall reduction of capacity expansion activities suggested a rise of around 2%. Power 10% in spending on renewable power compared with 2019. investment reflects ongoing capital expenditures on projects under Among renewables, distributed PV has been hit hard as households and construction. As such, this decline is influenced not just by the new corporates cut back on spending, and installation activities face the capacity additions and refurbishments expected this year, but also highest disruption from lockdowns. The effect on utility-scale wind and spending on assets that would be delivered in the years ahead. solar PV projects is lower, and spending is also influenced by continued Government policies will play a critical role in smoothing the impact, cost reductions, especially in solar PV. Nonetheless, final investment and – as noted in past WEI editions – over 95% of power investments decisions (FIDs) for utility-scale solar and wind in Q1 2020 declined to are incentivised by regulations and contracts. Q1 2017 levels. Investment in longer-lead time technologies, offshore Some parts of power investment are more exposed, particularly fossil- wind and hydropower, is set to rise supported by ongoing projects based generation, as lower demand and electricity prices create less around the world, and completion of two mega hydro projects in China, need for new capacity and add pressure on margins. Investment in though there are risks of delays in some regions. new coal-fired plants has already fallen sharply in recent years and is set Nuclear investment is set to decline given some impact to development to decline by over 11%, with cuts concentrated in Asia. Nevertheless, schedules, but long associated lead times make spending less volatile. investment activity in China (see next page) may put a floor under further reductions in 2020. Investment in grids, which has been declining in a number of countries, is set to fall again, by around 9% in 2020; despite its regulated nature. The effects on investment in gas-fired generation arise mainly from The impact will be larger in developing countries as most of the delays in gas-rich emerging economies, like the Middle East and North investment in networks is financed by state-owned utilities that were in Africa (MENA) region where spending drops by about one-third, given weak financial position before the crisis, and will likely worsen, driven high public-sector participation in the sector, lower expected revenues by more limited fiscal capacity from governments and higher financing from commodities and limited fiscal space. We estimate a reduction in costs as sovereign risks increase (see Energy Financing and Funding total fossil-based power investment of 15% globally compared to 2019. section). That said, grid spending falls less than generation, spurred by Higher shares of renewables have been dispatched during the ongoing upgrades in some markets (e.g. United States, Europe) to lockdown because of low operating costs and priority access to support resiliency and reliability and new support in China. networks: this, along with long-term contracts, has helped to support

Page | 71 IEA. All reserved. rights World Energy Investment 2020 Power sector

…and there are also specific regional dynamics, with policies playing a critical role in shaping the impact

Power investment in China, the world’s largest market, is set to A number of major utilities in these two markets have remained continue its downward trend in 2020 as the country faces its first optimistic and have maintained their capital spending plans for 2020. recession in decades, with reduced spending in all technologies. Despite this early signalling, a number of uncertainties persist, and it is Though lockdowns were mostly lifted by April and industrial production likely that signs of economic stress become more apparent through the resumed, energy investment in China has already been dampened by course of the year, as lockdowns affect deployment targets and the disruption to investment activity and supply chains. revenues. Smaller companies with weaker financial standing and tighter margins are likely to be more affected, with many such actors not Investment in China is nonetheless likely to be less affected, in relative providing spending guidance at all. First quarter results of power terms, than in other regions, as recent signals provide a buffer. These equipment companies point to intensifying challenges for this segment, include an upward revision in State Grid’s investment plan for 2020 and as delays and increased logistic costs affect revenues and profits in a slight year-on-year increase in investment of major power companies several of the main players, on the back of already tight profit margins in Q1. Spending in coal power may also see a lower percentage drop arising from fierce competition and trade tensions affecting supply (compared to other regions of the world and the annual reduction in chains. As such, our estimates for overall power spending are less recent years), as more regions got a green light for construction and optimistic than the announcments of the largest utilities would suggest. 8 GW of coal-fired capacity was approved in March 2020 (a similar amount to the coal-fired FIDs in China for the whole of 2019). Regions that rely heavily on public funding are also likely to see deep Renewables continue to account for the largest share of investment, cuts in spending, such as India and countries in Africa and Southeast and decline less than in other parts of the world, as spending on solar Asia. Enabling environments for investment in most of these countries PV and wind largely holds up. carry a number of risks that can challenge project bankability, though those with strong policies see spending support. The Indian Expectations for a robust year for renewables in Europe and the United government is taking measures to buffer the investment shock, States, based on prevailing project pipelines, have been reversed by including extensions for project commissioning, maintaining renewable the historic recession, and capital spending in the power sector is now auctions and trying to boost private capital. In some countries, recent set to decline in 2020. Solar PV and onshore wind see negative government announcements point to growing investment impacts, especially distributed PV, but offshore wind grows. Some large uncertainties. For example, investment expectations for Mexico and European- and US-based utilities have so far maintained a degree of Brazil – the two largest markets in Latin America – have deteriorating, as financial resilience – with electricity prices largely hedged in 2020, and Brazil is postponing all transmission and renewable auctions and increased profits in some cases from continuing operations in Q1 –

Mexico is slowing down the connection of renewables. helping to provide support for grid spending.

Page | 72 IEA. All reserved. rights World Energy Investment 2020 Power sector

Impacts of Covid-19 pandemic on power sector investment and revenues in 2020

Equipment production Operation of existing assets Construction/Approvals

• General delays due to lockdowns, affecting project timelines. Higher impact in • China, a major supplier of equipment, was countries with more strict and longer lockdowns (southern Europe) and where • Some impacts given mobility more affected in Q1 but has moved restrictions, though operation construction is seasonal (e.g. India given monsoon). towards full production since April. and maintenance (O&M) often • Limitations of interstate mobility of workers affecting installations in some • Disruptions in manufacturing of wind considered “essential business”. countries (e.g. India), or domestic rules (e.g. Polish workers have to do a 14-day turbines and equipment in several quarantine when returning to Poland). • Higher share of renewables European countries (e.g. France, Italy, dispatched in more countries • Robust previous expectations for investment in renewables in 2020 (especially Spain) and the United Kingdom in March- given lower electricity demand. in the United States and Europe) cushion the annual impact on investment, April and still ongoing in India. compared with other sectors. • Prices largely buffered from

Renewable power • Interruptions still expected across solar PV electricity market swings by • Higher impact expected in solar PV investments (compared to wind), value chain given that mobility restrictions policies and contract terms. particularly small-scale and distributed solar PV. persist in some Southeast Asian countries. • Overall expected decline in investment ~10% (versus 2019).

• Lower electricity demand will likely delay capital spending in fossil-based

power relatively more than renewable power, given lower need for new firm • O&M relatively unaffected (access permitted to workers). capacity and reduced power prices. • We also anticipate a larger impact in gas-fired investment given region-specific • Lower dispatching in many • Some disruptions given mobility countries. dynamics; important drop in MENA, which accounts for almost 20% of the restrictions. annual investments in gas-fired power (given countries’ dependency in fossil • Lower electricity prices given lower commodity prices and fuel exports, fiscal positions and overall expected impact in GDP); recent signs of support to coal-fired generation in China (e.g. large approvals). Fossil Fossil fuel power lower demand. • Overall expected decline in investment ~15% (versus 2019).

• General delays due to lockdowns, affecting project timelines.

• Larger impacts expected in lower-income economies where majority of electricity networks are financed through state-owned companies, many which • Some disruptions given mobility

restrictions. were already financially constrained (e.g. India and most countries in Africa and Southeast Asia). Networks • Overall expected decline in investment ~9% (versus 2019).

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Key policy and market announcements affecting investment and revenues in light of the Covid-19 pandemic

Region Key policy and market announcements

• The China Electricity Council announced that Q1 investment of major power companies increased 0.3% year-on-year – despite suffering the largest demand reduction in Q1. • The public utility State Grid of China (which accounts for around a third of the electricity investment) announces investments for a total of 450 billion Yuan in 2020 China (~USD 65 billion), with ultra-high voltage (UHV) projects accounting for 40% of total investment. • Additional signs of investment expected to increase in some sectors including UHV, pumped hydro storage and coal-fired generation (8 GW of coal-fired capacity were approved in March, close to the entire capacity approved in 2019 and higher than the 2018 approvals).

• Deadlines for commissioning of generation projects extended (e.g. France, Germany, Italy). Some large-scale renewables auctions postponed (e.g. Portugal), though schedules unchanged so far in other countries (e.g. Denmark, Italy, the Netherlands). • Major utilities have so far maintained spending plans from before the crisis (in some case budgets 5-10% higher than 2019) and increased profits in Q1 from continuous Europe operations, while companies continue to raise financing via debt issuance, particularly green bonds. • Despite lockdowns, construction has continued in many countries and some large solar PV and offshore wind projects in Spain and the United Kingdom came online in the first four months of 2020.

• The stimulus bills passed so far do not include specific support for the energy sector, though there is expectation that some may come. United • The largest US-based solar PV project (690 MW) was approved in May. Project includes a 380 MW battery storage system. States • The government signalled a post-2020 extension of tax credit eligibility for new solar and wind projects, to help account for delays; 1Q wind installations doubled compared with 1Q 2019 and the wind construction pipeline rose to record levels.

• Deadlines for commissioning of generation projects extended; Ministry of New and Renewable Energy (MNRE) confirmed extensions for the duration of the lockdown plus 30 days for renewable power projects (treated as force majeure). • MNRE declared “must run” status of renewable projects and ordered discoms to pay generators. Still, some relaxation of payments has been allowed, a signal of India persistent discom financial stress. Some state governments are also allowing payment delays by consumers on electricity bills. • Continuation of solar reverse auctions (a tender for a 2 GW solar PV project, for a price of for USD 34/MWh, was finalised on 16 April). • The government has put in place measures to boost power sector investment, particularly private capital (e.g. extending participation of non-financial banking companies, launching a new investment fund and improving bankability of power purchase agreements).

• Abu Dhabi announced a record low price of USD 13.5/MWh for a 2 GW solar PV plant. MENA • Iraq deferred its capital expenditure budget given low oil prices, putting at risk ~7 GW of planned generation expansion (over 5 GW of combined-cycle gas turbines and 1.7 GW of renewables for which planning had already been conducted).

• Korea doubled its subsidy for residential and commercial solar rooftop solar (to cover up to 80% of installed costs). Other • All auctions for transmission and large-scale renewable projects postponed in Brazil, and Mexico’s system operator banned renewable energy projects from performing tests required to reach commercial operation during May (to ensure grid reliability). regions • Potential wind curtailments to wind power independent producers from South African’s state-owned utility Eskom given lower demand.

• Viet Nam may reduce 15 GW of planned coal power by 2025; new feed-in-tariff announced for renewables.

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Disruptions to renewables supply chains have pushed some investment schedules back

Physical restrictions and new uncertainties over equipment demand suppliers, though they may be able to focus on repowering existing caused delays and disruptions to renewable supply chains in early assets and adopting more flexible payment terms. Consolidation 2020, and may continue. Solar PV module manufacturing was idled in pressure on smaller manufacturers with weaker balance sheets may China and other locations in Asia as restrictions initially took hold. In accelerate. Larger players may weather the storm with cost-cutting. Europe, some 20 wind turbine facilities stopped operating in March, This may also raise questions over research and development budgets mostly in Spain and Italy, with factories in India also stopping and efforts to advance turbine and module designs, for which there has production. Longer duration of these disruptions, and their spread to been good spending progress in recent years (see R&D section). additional locations like Southeast Asia, could derail renewables Solar PV module shipments by country of origin progress by further delaying the completion of many projects globally. China has an outsize impact on solar and wind supply chains; it 120 1.0

accounted for two-thirds of PV module shipments in 2019. Conditions GW

have eased there, with most factories back up and running by April, 100 USD/W 0.8 though operating margins remain tight on the back of low prices and oversupply – global shipments exceeded project additions by more 80 than 10% in 2019 – and plants requiring time to ramp up production. 0.6 The picture in some other countries has also appeared to ease. In some 60 US states, PV manufacturing is deemed an “essential business”, 0.4 allowing operation during restrictive periods. By mid-April, operations 40 resumed for some European wind plants. In general, manufacturer 0.2 service and maintenance businesses have remained up and running. 20 Many challenges remain for the industry. Before the crisis, equipment manufacturers faced financial pressures (see Energy Financing and 2012 2013 2014 2015 2016 2017 2018 2019 Funding section), with tighter margins stemming in part from competitive bidding and lower renewables prices. In 2019, India’s major China Malaysia wind equipment company defaulted on its bonds and is undergoing a Viet Nam Chinese Taipei large debt restructuring. Korea Others Given the uncertainties, some governments and utilities are delaying IEA 2020. All rights reserved. procurement, which means reduced order books and cash flow for Source: Calculations based on SPV Market Research (2020).

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In the lead-in to this crisis, spending in 2019 edged higher for renewables, was stable for thermal generation, but declined for electricity networks

Global power sector investment, at below USD 760 billion in 2019, was driven by higher investment in wind. China’s renewable power spend down by less than 2% compared with 2018, driven mainly by a strong edged down in 2019 as an increase in hydropower was not large drop in capital spending on electricity networks, which offset the enough to offset lower solar PV (after a reduction in financial increase in nuclear power and small increase in renewables. incentives). Spending in Europe also edged down, due to wind, even as corporate buying activity increased. Investment in distributed solar In 2019, China continued to account for more than a quarter of the PV and battery storage comprised half of total spend in these overall investment, though its spending dropped as a result of lower technologies. spending in grids, coal power and solar PV projects. On the other hand, the United States and Europe saw strong increases. The US Nuclear power investment edged up again, as several projects started growth was driven by a big increase in wind power and networks. In construction in 2018 and four additional ones did so in 2019. This was Europe, fossil fuel and nuclear power drove spending upwards. an important driver of growth in Europe given the two reactors of Hinkley Point that started construction during the period. Global spending on coal-fired power plants dropped by 6% in 2019, reaching a decade low. The main reduction occurred, once again, in A 7% drop in spending in electricity networks was the main reason for China (although FIDs in China picked up in 2019). Despite the falling the overall fall in global power investment in 2019. This was mainly trajectory, the size of the global coal fleet continues to grow as more due to an 11% drop in China’s investments, mostly driven by regulatory capacity entered into operation than retired. changes and reduced grid tariffs, outweighing continuous growth in the United States (which reached the top place for network Gas-fired power spending reversed its recent trend and increased in investments for the first time in a decade). In addition, global 2019, reaching levels similar to 2014-15. Spending continued to slow spending in transmission reduced to USD 90 billion, below the in two of the largest markets, the United States and MENA (following a USD 100 billion level that was surpassed between 2016 and 2018. considerable slowdown in FIDs in 2017-18), and increased mainly in Investment in battery storage dipped for the first time, by 12% to Europe and Russia. USD 4 billion in 2019%, though partly due to falling costs. Renewable power spending, at around USD 310 billion in 2019, grew The overall share of power investment in developing economies by 1%. There was increased spending on wind power in the United dropped to the lowest level since 2013. This was mainly due to the rise States, a sector that has been growing fast given good resources, in spending in Europe and the United States during the last years – policy support (e.g. production and investment tax credits) and which has also reduced the gap with the largest market (China). demand from corporate power purchase agreements (see Energy

Financing and Funding section). Spending increased slightly in India,

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Final investment decisions

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FIDs for coal-fired power plants in 2019 declined to their lowest level in 40 years, even as they went up in China, a trend that may continue in 2020

Coal-fired power generation capacity subject to an FID

120 GW

100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1Q 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1Q 2020 2020

China India Southeast Asia Rest of world Subcritical High efficiency

IEA 2020. All rights reserved. Note: FID = Final investment decision. 1Q 2020 data are based on announced approvals in China and confirmed FIDs in other regions. Source: IEA calculations based on McCoy Power Reports (2020).

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Despite record retirements and low FIDs, the coal power fleet has continued to expand, particularly in Asia, with a large pipeline of projects under construction

Net annual additions, retirements and construction of coal-fired plants by region, 2011-23

150 Rest of the world UnderJapan construction & United Kingdom 100 announced retirementsUnited States Capacity(GW) (cumulativeGermany capacity) Indonesia 50 India China Rest of the world Japan 0 United Kingdom United States Germany -50 Indonesia India China Net additions -100 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020-23 IEA 2020. All rights reserved. Note: The 2020-23 column reflects projects under construction and announced retirements (for China, the 2020-23 retirement estimate is based on the annual average of retirements between 2017 and 2019). Source: Global Energy Monitor (2020).

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Low electricity demand in 2020 reduces the need for firm power, piling pressure on older, less efficient coal plants, but there are still fewer retirements than newly commissioned capacity

Global FIDs for coal-fired generation, at below 17 GW in 2019, dropped smaller plants (on average), mostly below 200 MW. Except for China, for the fourth year in a row—the lowest level since 1980, despite an where the average age was 20 years old, most countries retired plants increase in China. Pressure from civil society, more stringent that were at least 40 years old. In the United States, plants operated environmental regulation and decreasing availability of finance (see between 45 and 60 years before being retired, though there seemed to Energy Financing and Funding section) for new coal-fired power is be a trend towards decommissioning younger plants. pushing this downward trend. The majority of the 2019 FIDs for coal-fired More retirements have been announced for the coming years but the plants (almost 90%) were once again in higher efficiency plants, with only global coal power fleet is set to continue expanding, given a large a very small portion in inefficient subcritical projects, mainly in Indonesia. existing construction pipeline. There are some 130 GW of projects under Nevertheless, net additions of coal-fired plants in 2019 rose for the first construction that are expected to start operation between 2020 and time in five years, driven by an uptick in newly commissioned plants in 2023; taking anticipated retirements into account, this would mean net China and, to a lesser extent, in India. Additions in China were a result of growth in the global coal fleet of around 40 GW. There continues to be a various factors, including: support to industrial and economic activity, geographical mismatch between retirements and additions, but there are utilities’ expansion targets and domestic generation plans (linked with some new signals coming from countries which until now had been issues around security of supply). This growth also came in the face of mainly adding capacity. For example, the government of Indonesia weakening electricity demand and falling utilisation rates for the existing announced in early 2020 that it will replace coal-fired plants aged fleet (which are likely to carry through in 2020), intensifying the risks of 20 years or older. According to IEA analysis, if this were to be overcapacity. implemented, it would translate to around 7 GW of coal-fired plants Over 250 GW were retired globally between 2011 and 2019, two-fifths in being retired. the United States and almost a fourth in China. The United Kingdom and Lower expected electricity demand and prices in 2020 would likely delay Germany accounted for an additional 15%. Most of the plants retired capital spending in coal-fired plants further, given a lower need for new were subcritical but as countries face increasing pressure to improve air firm capacity. However, pressure to stimulate economic growth in quality and environmental standards, some more efficient plants are also emerging Asia may challenge this. For example, in March 2020, China being retired. A relatively low gas price environment also helped announced 8 GW of coal-fired capacity approved, a level similar to the accelerate this trend. overall capacity approved in 2019, and more than 2018. The government The average size of plants retired was highest in the United Kingdom, also lowered the restrictions to build new coal-fired plants for the third while China, India and – until mid-2010s – the United States retired consecutive year, giving a green light for construction in more regions of the country.

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FIDs for gas-fired power plants increased for the first time since 2015, driven mainly by the United States

Gas-fired power generation capacity subject to an FID

100 GW

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 US MENA Southeast Asia China Rest of world Gas turbine Combined cycle

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FIDs for large-scale dispatchable low-carbon power (nuclear and hydro combined) fell to their lowest level this decade

Dispatchable low-carbon power generation capacity subject to an FID

FIDs for hydropower FIDs for nuclear 40 GW

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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FIDs for utility-scale wind increased in 2019 (in spending terms), led by offshore projects, while there were fewer financings of solar PV. In the first quarter of 2020, FIDs fell 30% year-on-year

FIDs for utility-scale renewable plants

90 Other renewables 80 Wind

USD billion 70 Solar 60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 2016 2017 2018 2019 2020 IEA 2020. All rights reserved. Notes: Excludes large hydropower. Source: IEA calculations based on Clean Energy Pipeline (2020).

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Growth in FIDs in 2019 was concentrated in gas-fired power and large-scale wind projects, while 2020 could see fewer approvals across the board

Overall, FIDs for the main sources of large-scale dispatchable power – the coming months. State Grid of China started building a new pumped coal, gas, nuclear and hydropower – fell to 86 GW, an 8% reduction hydro dam in early 2020 after putting a halt to installations during most compared with 2018 and almost 60% lower than in 2010. This is the of 2019. lowest level in a decade. FIDs for nuclear also decreased, with only four new plants starting Among these sources, FIDs for gas-fired generation were the only ones construction, the biggest one the second reactor of Hinkley Point in the to see an increase (for the first time since 2015), to over 55 GW. The United Kingdom, which started construction in December 2019. strongest growth was in the United States, where gas generation, Outside of a few markets with strong policy support, construction starts supported by low prices, is teaming up with renewables to displace for nuclear projects continue to lag, with persistent project coal: some 5% of the US coal power fleet retired in 2019. The MENA development challenges in some markets, and in some cases local region also saw considerable growth, particularly in the Gulf opposition. Cooperation Council countries. China’s investment decisions fell to FIDs for utility-scale renewables decreased in spending terms below 10 GW, even as they remained high in comparison with approvals (i.e. nominal USD terms) by 2% in 2019, despite divergences between in recent years, supported by broader targets to increase gas use. In the technologies. Utility-scale solar PV FIDs decreased by 20% as they past decade, the share of FIDs has risen for combined-cycle plants, faced higher regulatory uncertainty and more competitive pressure in compared with smaller gas turbines typically used for peaking developing markets such as China and India. However, while onshore applications. This stems from a focus on meeting large-scale demand wind FIDs remained flat, offshore wind FIDs increased by 70% and hit a (and replacement) needs, but it may also reflect increased battery record of USD 40 billion, with investors showing high appetite in China, storage deployment to provide short-term system flexibility. Chinese Taipei, Germany and the United Kingdom. FIDs for the largest sources of low-carbon dispatchable generation Data from the first quarter of 2020 show that FIDs for utility-scale (hydropower and nuclear) also fell to a combined total of 14 GW, the renewables (excluding large hydropower) contracted to first-quarter lowest level this decade. The drop in FIDs for hydropower, also a record 2017 levels, with downturns in onshore wind (year-on-year reduction of low, stemmed from fewer approvals for pumped storage in China. 50%) and solar PV (down by 20%). This reflects some risk-aversion to Chinese regulation does not allow transmission and distribution financing projects in the near-term given lower demand and wider companies to include pumped hydro assets as part of their regulated uncertainties that emerged with the Covid-19 pandemic, and is asset base (used to estimate the tariff these companies charge). With consistent with a parallel fall in global power sector project finance lower electricity demand in 2019, and lower demand expected in 2020, transactions during that period (see Energy Financing and Funding there is also less need for pumped hydro to balance peaks. However, section). the downward trend in Chinese hydropower investment may reverse in

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Implications of power investment

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Expected output from low-carbon power investments in 2019 was more than enough to cover lower global growth in electricity demand

Global expected generation from low-carbon power investments compared with electricity demand growth

1 000 Nuclear TWh 900 Solar PV and wind 800 Hydro and other 700 renewables Demand growth 600

500

400

300

200

100

2013 2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: Expected generation is based on the expected annualised output of the capacity associated with investment in a given year. Nuclear includes investments on life extensions.

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In China, low-carbon investments have not kept pace with electricity consumption growth, while weaker demand in India was surpassed by low-carbon investments for the first time

Expected generation from low-carbon power investments compared with electricity demand growth

China India 500 TWh 400

300

200

100

-100 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019

Hydro and other renewables Solar PV and wind Nuclear Demand growth

IEA 2020. All rights reserved. Notes: Expected generation is based on the expected annualised output of the capacity associated with investment in a given year. Nuclear includes investments on life extensions.

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Low-carbon power investments have almost always run ahead of electricity demand in the United States and Europe

Expected generation from low-carbon power investments compared with electricity demand growth

United States Europe 200 TWh

100

-100

-200 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019

Hydro and other renewables Solar PV and wind Nuclear Demand growth

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The level and composition of power generation investment in 2019 would need to change rapidly to support a more electrified and sustainable future

Power generation investment compared with annual investment in the Sustainable Development Scenario (2025-30)

200 800 Fossil fuels 180 without CCUS 700 160 600 Fossil fuels 140 with CCUS USD billion USD (2019) 120 billion USD (2019) 500 Nuclear 100 400 80 300 Solar PV and 60 wind 200 40 100 Hydro and 20 other renewables 2019 SDS 2019 SDS 2019 SDS 2019 SDS 2019 SDS 2019 SDS 2019 SDS China United Europe India Southeast Sub- World States Asia Saharan Africa

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Electricity is pivotal to modern societies and to energy transitions, but investment in the sustainability and flexibility of power systems is falling short

Understanding the energy impact of power investments is important The largest projected growth in investment to align with such a to assess their contribution to meeting long-term goals. In 2019, the pathway would be required in solar PV and wind, on average an extra global expected generation from low-carbon power investments USD 160 billion of spending each year. Electricity networks would outpaced electricity demand growth for the first time in five years. require an extra USD 150 billion from today’s levels, in addition to a Part of this stemmed from weaker demand, which had the lowest higher level of capital for other renewables and nuclear. growth in a decade, and a sharp reversal from the trend in 2018. Comparing current trends with projections in the SDS, emerging Demand growth was around 30% lower in China, while India saw no economies would need to boost spending on renewables, while at the growth for the first time in ten years; declines were also registered in same time supporting other areas of power system flexibility and the United States and Europe. Part of this reduction in demand may decarbonisation, such as through flexible operation of thermal plants, have been temporary (e.g. an exceptional monsoon in India reducing fossil fuels with CCUS, grids, energy storage and demand response. electricity needs for irrigation) but there are considerable downside Investments in China present the highest divergence. India, Southeast risks to electricity demand in 2020 given the Covid-19 pandemic. The Asia and sub-Saharan Africa would need to more than double IEA estimates a drop in global electricity demand of 5% globally in renewable investments. Nuclear would likewise see increased 2020. investment, particularly in China, with additional annual spending of At the same time, the expected output from low-carbon power USD 10 billion, and India, with an additional USD 5 billion. investments rose, largely due to a higher contribution from new solar In advanced economies, the gap is smaller for solar PV and wind, but PV and wind. Here, too, there are significant caveats to this picture, they would still require uplifts of 20-30% in Europe and the United with a slowing of spending from short- and medium-term impacts States. Hydro, other renewables and nuclear remain as key related to the current crisis. technologies to guarantee security of supply and to meet Current investment levels are not aligned with a sustainable pathway. sustainability goals. However, 2019 spending on these technologies Compared with the average annual investments projected in the IEA was well short of SDS projections, by USD 10 billion for investments in SDS, power sector spending in 2019 was about 35% short of the level nuclear for Europe and by USD 20 billion in hydro and other required a decade from now. There is a continued need for capital renewables for the United States. reallocation to meet energy security and sustainability goals, to bring in more low-carbon power and to ensure that renewable-rich systems can operate with sufficient system flexibility.

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Trends in renewable power costs and investments

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Falling costs mean that every dollar invested in renewables buys ever more power

Investment in renewable power – actual spending versus investment at constant 2019 cost levels

Renewable power investment Investment at constant 2019 costs

400

350

300

USD (2019) billion (2019) USD 250

200

150

100

2012 2013 2014 2015 2016 2017 2018 2019 2020 2012 2013 2014 2015 2016 2017 2018 2019 Solar PV Wind Hydropower Other renewables Total renewables

IEA 2020. All rights reserved. Note: Investment is measured as the ongoing capital spending in renewable energy capacity. Source: IEA analysis with calculations for solar PV, wind and hydropower based on capital costs from IRENA (2020).

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A combination of more advanced technology, improved operations and lower cost of capital has steadily improved the economics of solar PV and wind …

Impact on levelised cost of electricity for newly commissioned renewable power capacity, by level of financing costs, 2015-20

United States Europe 200

150 Reduction given USD /MWh USD (2019) improved financing

100

2015 2019 2020 2015 2019 2020 2015 2019 2020 2015 2019 2020 2015 2019 2020 2015 2019 2020

Solar PV Onshore wind Offshore wind Solar PV Onshore wind Offshore wind

IEA 2020. All rights reserved. Notes: Figures are indicative estimates (expressed in real terms). Upper limits of the columns show the levelized cost of electricity (LCOE) using a standard weighted average cost of capital (WACC) representing average market risk (8% in advanced economies and 7% in developing economies). The length of the column illustrates how much the LCOE of the technology in the specific region has dropped as a result of reduced financing costs. Capital costs are based on commissioning dates and the terms of the WACC are based on financial close.

Source: IEA analysis based on technology capital costs from IRENA (2020).

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… with improved financing conditions also playing a major role in bringing down costs across technologies

Impact on levelised cost of electricity for newly commissioned renewable power capacity, by level of financing costs, 2015-20

China India 200

150

USD /MWh USD (2019) Reduction given improved financing 100

2015 2019 2020 2015 2019 2020 2015 2019 2020 2015 2019 2020 2015 2019 2020

Solar PV Onshore wind Solar PV Onshore wind Offshore wind IEA 2020. All rights reserved. Notes: Figures are indicative estimates (expressed in real terms). Upper limits of the columns show the levelized cost of electricity (LCOE) level using a standard weighted average cost of capital (WACC) representing average market risk (8% in advanced economies and 7% in developing economies). The length of the column illustrates how much the LCOE of the technology in the specific region has dropped as a result of reduced financing costs. Capital costs are based on commissioning dates and the terms of the WACC are based on financial close. Source: IEA analysis based on technology capital costs from IRENA (2020).

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Benchmark costs have declined steadily, but recent bidding results suggest even lower contracted prices in some markets

While capital expenditures for renewable power increased moderately On the debt side, financing terms have improved globally. This is due to in 2019, by 1%, driven by onshore wind and hydro outweighing a lower base interest rates (driven by accommodative monetary policy decline in solar PV, capital costs for some technologies have continued and lending competition) and lower debt risk premia (from a maturing to decrease. For example, utility-scale solar PV installation costs renewables industry and the risk reduction role of supportive decreased by over 10%, continuing a trend of declines due to government policies and ambitious goals). For example, evidence supportive policies (e.g. expansion of competitive auctions) and higher shows that lower risk perceptions contributed to improved availability deployment in lower-cost and large markets such as India. A given level and pricing of project debt finance in India for utility-scale solar PV and of investment buys much more renewables than in the past. The wind projects over 2014-18 (CEEW and IEA, 2019). Debt risk premia fell expenditure needed for 1 MW of renewables in 2012 enables the by 75-125 basis points for both technologies over the period, with banks construction of 1.5 MW today. willing to lend for longer tenors. On the equity side, expected returns Decreasing capital costs have helped to reduce overall levelised costs of on equity have also lowered globally, as supportive policies and electricity (LCOEs) for solar PV and onshore wind, along with other growing market experience helped reduce investor risk perceptions. factors such as the improvement in average load factors. For wind The upshot is that LCOEs for newly commisioned utility-scale solar PV projects, for example, larger turbines and increased hub heights mean and onshore wind plants have fallen to around USD 35/MWh to wind farms are able to produce a greater amount of power with a smaller USD 55/MWh in China, Europe, India and the United States (assuming number of turbines. This trend is also driving reductions in operation and low cost financing). Even lower prices have also emerged in maintenance costs, favoured by efficiency gains from digitalisation. competitive auctions for capacity to be commissioned in the years Financing costs are also a critical component of LCOEs and reduced ahead, e.g. prices below USD 20/MWh in Brazil, Mexico, Portugal, Qatar WACCs have been vital to scale up renewable deployments globally. and the United Arab Emirates. For example, applying a standard average real WACC of 8% to a US Central banks are likely to keep interest rates low to stimulate growth. solar PV project in 2019 produces an LCOE of around USD 80/MWh in Yet some emerging countries may face challenges as sovereign risks 2019. The LCOE for the same project with access to lower-cost increase and there are signs that commercial banks may raise margins financing (4% on average) is just over USD 50/MWh. Actual required on project lending to compensate for higher liquidity costs. Uncertainty returns depend a lot on the degree of associated market risk. can also mean more difficulties to mobilise equity globally. We expect a Involvement of public finance has been key to reduce the cost of lower annual drop in indicative LCOEs in 2020 with financing costs capital in emerging markets, such as India, which on average face staying level or potentially rising as a result of new risks. higher financing costs (given higher country, technology and revenue risks).

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Wind repowering is already an important source of investment in Europe and the United States, and more is yet to come

Wind repowering refers to the refurbishment or upgrading of wind Historical investments in wind repowering and potential turbine system components with the latest and more advanced investments on future wind farms reaching end of life equipment. Taking advantage of technological improvements, repowering enables not only to increment the nameplate capacity of 9 an existing wind farm, but also to enhance load factors and to reduce 8 operation and maintenance costs. This is mainly driven by larger 7 turbines and increased hub heights that allow production of a greater amount of power with a smaller number of turbines 6 More than 10% of total spending in onshore wind has been devoted to 5 USD billion USD (2019) repowering in the United States and Europe in the last three years. 4 However, as more and more turbines reach the end of their useful life (20-25 years), global repowering is expected to steadily rise and get 3 close to USD 10 billion per year, two to three times higher than the 2 2017-19 annual levels. 1 Wind repowering could surge even faster if properly incentivised by regulation or economics. For instance, India has more than 10 GW of 2017 2018 2019 2020-22 wind turbines with less than 1 MW capacity in very good resource Actual investments Average annual sites. Repowering of these with the latest turbines would more than investments needed to quadruple the energy generation of these sites. In the United States, repower assets reaching investments in repowering in 2017-19 were more than ten times higher their 20-25 year life the equivalent needed to refurbish the ageing plants. United States Europe China India Rest of the world Repowering may also become an increasingly attractive option for developers reluctant to commit large upfront capital to greenfield IEA 2020. All rights reserved. developments in light of the current crisis.

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Networks and battery storage

Page | 97 IEA. All reserved. rights World Energy Investment 2020 Power sector

Global investment in electricity networks fell again in 2019, by 7%, as decreased spending in China outweighed continued growth in the United States

Investment in electricity networks by geography (left) and segment (right)

350

300

250 USD billion USD (2019)

200

150

100

2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 United States China India Europe Rest of the world Transmission Distribution

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Spending on digital grids now makes up nearly a fifth of networks investment

Investment in electricity networks by equipment type

350 35% EV chargers

300 30% Smart grid infrastructure

Smart meters 250 25% USD billion USD (2019) Power equipment 200 20% Rest of networks

150 15% Share of digital grid infrastructure (right) 100 10%

50 5%

2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: Two- and three-wheeler EV charging stations are excluded from the analysis. Smart grid infrastructure comprises utility automation equipment at substation level. Power equipment corresponds to transformers, switchgear, power systems and substations.

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Electricity networks are the backbone of today’s power systems and they become even more important in clean energy transitions, but investment needs to pick up

In 2019, investment in electricity grids declined for the third As grids are becoming more digital, distributed and smart, investment consecutive year, by 7% compared with 2018 levels, falling under depends less on traditional equipment and more on new drivers. Smart USD 280 billion. Most of this decline stemmed from a sharp reduction meters, utility automation and EV charging infrastructure, at in China, which more than outweighed strong growth from the United USD 40 billion, now make up more than 15% of total spending. While States, which took the top spot for grid investment for the first time in a spending on smart meters and utility automation remained flat in 2019, decade. Nevertheless, there are questions over how these trends may that for EV charging infrastructure rose to more than USD 5 billion, with play out in 2020, with utilities facing potentially reduced needs to utilities, oil and auto companies, and governments announcing new connect new generation and funding constraints; on the other hand, expansion plans. For instance, China Southern Power Grid recently public incentives to increase infrastructure investment in the wake of announced plans to invest more than USD 3 billion over the next four the Covid-19 pandemic may potentially offer support to spending. years in charging infrastructure. Global spending in transmission reduced by 10% to USD 90 billion. By virtue of these digital infrastructure investments, electricity systems China and India drove this trend. Investment in China’s transmission have augmented their resiliency and ability to operate with greater decreased by nearly USD 10 billion, as there was a higher focus on the shares of variable renewables, as demonstrated during recent periods upgrading of rural power grids and the construction of distribution of much lower demand (IEA, 2020a). Such investments are supporting networks. In India, despite a big push to strengthen inter- and intrastate new business models by aggregators to integrate small-scale transmission capacity in the last five years, the pace of buildout slowed renewables, demand response, and other distributed resources into in 2019 by USD 2 billion. In addition, several renewable projects on the power grids, when regulatory conditions and market design are pipeline are facing higher uncertainties and delays, so there was less appropriate (see Energy Financing and Funding section). They can also pressure on the need for transmission connectivity. facilitate the integration of power systems with more localised networks for heat supply as an another source of flexibility (see Energy End Use Capital spending in distribution decreased, too, but at a smaller rate and Efficiencyse section). (6%). On the one hand, investments in the United States grew for the fifth consecutive year, driven by ongoing focus of regulators and The current trajectory of grid spending is at risk of falling short of that utilities on improving grid resilience and reliability. On the other hand, needed to support growing renewables and electrification. Overall distribution investment declined worldwide except for Europe and global grid spending would need to rise by some 50% over the next China, where they remained stable. This was driven by lower growth decade to meet long-term sustainability goals. Spending on digital rates for electricity demand. grids would need to surge, too.

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In China, market reforms resulted in reduced margins and greater capital discipline for grid companies, though stimulus packages may support spending in 2020

China: Electricity sales margins for grid companies (left) and total power grid investments (right) Purchase-sale spread for power grid companies Power grid investments 50 100

40 80

30 billion USD (2019) 60 USD (2019) / kWh / (2019) USD

20 40

10 20

2015 2016 2017 2018 2015 2016 2017 2018 2019

State Grid Corporation of China China Southern Power Grid Distribution Transmission Inner Mongolia Electric Power IEA 2020. All rights reserved. Note: Purchase-sale spread = difference between the price at which power grid companies purchase electricity from generators and the price they obtain for selling it, including lines losses. Source: Calculations for purchase-sale spread based on China Electricity Council (2020) and National Energy Administration (2020).

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US grid spending has responded strongly to the policy emphasis on network resilience and reliability, though recent investment increases stem in part from rising costs

United States: Transmission investment costs (left) and decomposition of spending growth since 2011 (right) Transmission line costs Transmission investments 800 30

25 600 20 USD billion USD (2019)

400 15 USD (2019) thousand km / thousand (2019) USD 10 200 5

2011 2012 2013 2014 2015 2016 2017 2018 2019 2011 2012 2013 2014 2015 2016 2017 2018 2019

Land and land rights Poles, towers and fixtures 2011 investment Uplift due to costs Uplift due to activity Conductors and devices Asset retirement costs IEA 2020. All rights reserved. Source: Calculations for costs based on EIA (2020).

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A rising share of Europe’s grid spending supports upgrading and refurbishment, rather than expansion, as variable renewables, digital technologies and electrification have grown

Power grid investment trends in Europe

200 Transmission and distribution lines net additions 2015=100 160

Transmission and distribution investments 120

Solar PV and wind share 80

40 Digital grid infrastructure investment

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Regional variations in grid spending are explained by the balance of different regulatory priorities to support market reforms, boost resilience and integrate new technologies

China’s investments in electricity grids accelerated their downward Despite this slowdown, actual investment spending has remained trend and dropped by 11% in 2019, mainly driven by regulatory robust as the focus shifts to new digital infrastructure. Electric vehicle changes and reduced grid tariffs. Average purchase-sale spreads for charging infrastructure surpassed 170 000 units in 2019 and smart grid companies (i.e. the difference between the price at which meters are reaching the roll-out target of 80% market penetration of transmission companies purchase electricity from generators and the the European Union by 2020. Investments have also aimed to price they obtain for selling it, including lines losses) decreased by integrate variable renewables, as solar PV and wind have increased 10% between 2016 and 2018. This reduction has been incentivised by that share in the energy mix from 10% in 2015 to almost 15% in 2019. both the Power Sector Reform of 2016 (which aimed to provide more Furthermore, a continuous improvement of market coupling schemes transparency with regard to network costs) and public measures that both regionally (more markets integrated) and temporally (more time- sought to reduce the power retail tariff. Furthermore, some intra- scale products including some ancillary services) have also led to provincial and long-distance transmission line tariffs have also been higher efficiency and better utilisation of existing grid assets. revised down. However, the ambitious European Green Deal targets – which will Grid investment in the United States increased by 12%, following a likely surpass the present European Union target of 32% share of continuous upward trend in the last decade. Higher activity was renewables in gross final energy consumption by 2030 and aim to required to upgrade ageing infrastructure, digitalise, electrify sectors speed the pace to carbon neutrality by 2050 – will require much such as transport or heat, and secure the grid against natural disasters higher investments and greater efforts at integration, not just with the and cyberattacks. Higher costs have also played a role: transmission power sector, but with transport and heating systems as well. costs have steadily increased by an annual rate of 3% since 2011. Offshore wind, in particular, is to play a pivotal role in the future low- Poles, towers, fixtures, conductors and devices continue to be the carbon power system of Europe, with investments in enabling grid principal drivers of transmission line costs. infrastructure potentially increasing tenfold from current levels under targets being considered. In Europe, investments have remained stable at nearly USD 50 billion, with an increase in spending going to support upgrading and refurbishment of the existing grid, as the role of variable renewables and electrification have grown. This is evidenced by a slower pace in transmission and distribution network expansion since 2015, while investments in digital grid infrastructure have risen steadily.

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Investments in battery storage exceeded USD 4 billion, but total spend fell for the first time, with falling costs playing a big role

Investment in stationary battery storage

Grid-scale battery storage Behind-the-meter battery storage

2.5 Rest of the world Middle East China 2.0 Korea Japan USD billion USD (2019) 1.5 Australia Europe United States 1.0

0.5

2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Sources: IEA analysis with calculations based on Clean Horizon (2020), China Energy Storage Alliance (2020) and BNEF (2020a).

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Activity was stronger in behind-the-meter storage than in grid-scale applications

Investment in battery storage declined for the first time, by 13%, though storage was coupled with solar PV and 115 MW with wind. The rest was remained above USD 4 billion in 2019. Spending on grid-scale batteries coupled with thermal power and other renewables. decreased by nearly 15%, while investments in behind-the-meter Grid-scale battery investments in 2020 are expected to decline in storage decreased by 5%, as costs continued to fall rapidly. response to a broader slowing of power activity, but this pause is likely Globally, average costs continued to come down as battery pack prices to be shortlived given their growing role in system security and fell and developers continued to reduce balance-of-system costs flexibility. Some large projects have been recently announced, such as (e.g. mounting equipment, cabling and labour). The trend diverged from Southern California Edison, who signed contracts to procure between segments, with an 8% reduction registered for grid-scale 770 MW or Solar Partners XI, LLC project in las Vegas which aims to battery storage and a nearly 15% drop in costs for behind-the-meter develop a 690 MW solar PV plant paired with a battery of 380 MW. applications. Greater cost reductions for behind-the-meter were Global behind-the-meter battery storage spending partly reflects the achieved as the market gained traction, improving efficiencies in market for distributed solar PV, for which investment slowed in 2019. engineering and construction, reaching higher standardisation around Investments in China and Korea both nearly halved mainly driven by system design, taking advantages of maturing supply chains and lower costs, as new entrants and manufacturers are entering the increasing competition with new entrants. However, behind-the-meter market. Activity was also hit in Korea as investigations into 2018 fires batteries remain around twice as expensive as grid-scale ones on a concluded in mid-2019, leading to stronger safety measures. Still, in the USD-per-kilowatt-hour basis (under USD 350/kWh for a four-hour United States, spending on batteries nearly doubled, as supported by battery versus USD 700/kWh for a two-hour one). California’s funding for resilience applications serving wildfire- Among markets for grid-scale storage, 2019 spending decreased in threatened parts of the state. In 2020, global spending is likely to slow, almost every region, except for Australia and the Middle East (the latter in line with fewer consumer installations of distributed resources. pushed by several sodium sulphur batteries developed in the United In terms of performance, discharge duration hours (the ratio between Arab Emirates). In Korea, fires reported at energy storage systems in energy storage capacity [kWh] and rated power [kW]) for grid-scale 2018 led to higher safety and regulatory standards, whereas in China, batteries increased for a fifth consecutive year and reached a level of regulation uncertainty resumed in batteries not being considered as 1.8 hours, 60% higher than 2015. This trend is supported by more networks fixed assets, thus grid companies losing interest in using projects moving beyond short-term applications, such as frequency batteries as replacements for other network investments. Deployment control, to include a wider spectrum of services, such as energy surpassed the 1 GW barrier for a second consecutive year. Half of this arbitrage, firm capacity or renewables integration, which also enhance new capacity was devoted to hybrid battery storage projects (coupled the sources of remuneration (see Energy Financing and Funding with power generation assets). Within these, almost 300 MW of battery section).

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Energy end use and efficiency

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Overview of energy efficiency investment trends

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Global energy efficiency investment remained stable in 2019, as efficiency improvements fall behind targets around the world; spending is set to fall in 2020 with the economic downturn

Global investment in energy efficiency by sector

300 Transport

Industry 250 Buildings

USD billion USD (2019) 200

150

100

2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Note: An energy efficiency investment is defined as the incremental spending on new energy-efficient equipment or the full cost of refurbishments that reduce energy use. The intention is to capture spending that leads to reduced energy consumption. Under conventional accounting, part of this is categorised as consumption rather than investment. The total in all years is slightly higher than that shown in WEI 2019 due to the inclusion of additional national-level data in the buildings sector. Please see WEI 2020 methodology document.

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A recession could trigger spending cuts of over 10% in key sectors for energy efficiency spending this year, if the last economic crisis is a guide; this time China will also be impacted

Trends in sectoral indicators for three major economies that are relevant to key sectors for energy efficiency, 2000-19

EU US China 140 140 400

120 120 300 Index (2007 = = (2007 Index 100)

100 100 200

80 80 100

60 60 2000 2004 2008 2012 2016 2000 2004 2008 2012 2016 2000 2004 2008 2012 2016 Industrial value-added Vehicle sales Construction value-added GDP IEA 2020. All rights reserved. Note: GDP and value-added are in constant currency units. Sources: IEA calculations based on BEA (2020); Eurostat (2020); NBS (2020); and OICA (2020).

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Weak consumer spending in 2019 kept a lid on energy efficiency investment and key equipment sales, while the 2020 outlook is gloomy and more reliant on government policy than ever

A total of USD 250 billion was invested in energy efficiency across the despite a drop in the overall market (including a decline in total sales in buildings, transport and industry sectors in 2019, the same level as the China) as fuel economy standards began to make an impact. Still, previous year. While there were signs of new activity in some areas, freight vehicles generally have higher upfront costs, making purchases annual changes for each sector remained moderate. Energy efficiency hard to justify for smaller enterprises despite lower lifetime fuel costs. investment is not enough to meet sustainability goals and reduce the Energy efficiency investment may fall by over 12% in 2020, mostly due effort required from energy supply. Primary energy intensity needs to to the 6% assumed decline in global economic growth, and then drop by an average of 3.6% annually to deliver on climate goals. In potentially in response to less available capital for efficiency projects 2019, the change was 2%, roughly the same as 2018 (IEA, 2020a). and lower energy prices, especially for oil. During the economic crisis a Policies and energy bills play a big role in influencing capital decade ago, key indicators for buildings, transport and industry fell by expenditure decisions to reduce future energy demand. However, more than the drop in GDP in Europe and the United States. In Europe, a overall consumer and business spending serve as the primary drivers. 4% dip in GDP in 2009 paired with a 10% drop in vehicle sales, In this light, the global economy was already slowing in 2019 with manufacturing value-added and construction value-added. US trends weakening trade, investment and manufacturing. Global GDP growth were similar, with a bigger impact on already declining vehicle sales. dipped from 3.5% in 2018 to 2.9% in 2019. Slower Chinese growth The recovery, especially in construction, was slow. The severity of this spilled over to other emerging economies, and was amplified by global year’s downturn means that China may be impacted more than a trade tensions. India’s construction growth rate more than halved to decade ago, with knock-on consequences for the global pace of 3%. Current weakness in consumer demand and supply chain recovery. disruptions have now brought new challenges to already fragile sectors. Policies provide a buffer for efficiency investments, and the robustness The buildings sector is still the largest destination of efficiency of mandates and incentives will serve as crucial factors in the uptake of spending. After faltering in 2018 in response to reduced government efficient goods over the next two years. Preferential support for support in Europe, it grew 2% in 2019 to over USD 150 billion. efficient vehicles and buildings in rapidly deployed economic stimulus plans could help shore up economies and moderate spending declines. Transport efficiency investment fell in 2019, as global car sales fell and The energy intensity of the economy will also be influenced by any with the most efficient cars trailing the wider market. A tussle between changes to mobility and work triggered by this crisis. Some changes electrification and preferences for larger cars has dampened fuel will raise efficiency, while governments could help to mitigate negative economy improvements in major vehicle markets, as higher sales of impacts of others, such as a lowering of urban density. internal combustion engine SUVs has more than offset the gains by EVs (see below). Spending on more efficient road freight vehicles stabilised

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Energy efficiency investment in buildings is rising, mostly in emerging economies, but the global trend is not keeping pace with overall construction activity

Global investment in energy efficiency in the buildings sector rose 2% In 2019, two-fifths of the buildings efficiency investment was in Europe, to approximately USD 151 billion in 2019, marking a return to steady where energy efficiency investment growth has outpaced construction growth after stabilising in 2018. However, the trend reflects a two- activities in some countries. Annual UK efficiency investment grew by speed market with stronger activity in emerging economies, especially 2.3% since 2016, while construction investment saw no growth. Similar China, and weaker markets Europe and North America. patterns were evident in Italy and Switzerland. The European Commission has stated that annual EU buildings efficiency investment Broadly, two factors determine buildings efficiency investment. First, must rise to EUR 177 billion to 2030 (EC, 2020). One measure to achieve there is the overall construction capital spending on new buildings and this, the Energy Performance of Buildings Directive, revised in 2018, refurbishments. Second, there are policies seeking to direct more of seeks to increase the yearly renovation rate to 3%. Norway, with this capital spending to new buildings with energy performance above USD 32 million, spent 25% more on residential buildings efficiency and buildings codes and to encourage efficient refurbishments of the announced a planned increase in its ENOVA funding. existing stock, including energy-using equipment such as heating systems. In Europe and North America, the refurbishment market is In Canada, the 2019 budget raised federal public spending on buildings dominant. efficiency by 20% to CAD 600 million. In the United States, however, overall investment in buildings energy efficiency was stable but the The construction market overall grew by nearly 5% to USD 5.9 trillion in number of states with mandatory building performance standards rose, 2019, a slowdown compared with the robust rate in 2018. Activity which should raise future investment. moderated across key areas including China, the United States, Western Europe, the Middle East and Australia. Efficiency investment In China, investment in buildings efficiency climbed by an impressive growth is therefore not keeping pace with activity directed towards 10% to USD 30 billion, but was outpaced by overall construction buildings globally, potentially storing up challenges for addressing less investment growth of 13%. As private investment in energy efficiency is efficient building stock during its operational lifetime of many decades. around four times the level of public spend, tighter energy performance standards could spur even more improvement in private buildings. Construction activity is expected to further weaken and decline in 2020, hurting buildings efficiency investment. Still, the cumulative Across India, energy efficiency investment is expected to rise as more effect of policies around the world may help to protect energy stringent buildings codes are published by states, though the outcome efficiency construction projects from the worst impacts of the will be strongly influenced by their implementation. However, India was downturn in some countries. In 2019, new or strengthened support for less than 5% of the global total in 2019. buildings efficiency investment was advanced in Canada, Norway Spain and Switzerland.

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Trends in end-use markets

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Consumers spend nearly seven times as much on improving buildings efficiency as on purchases of renewable heat equipment, which have declined in recent years

Spending on renewable heat sources for buildings and buildings energy efficiency investments by region

160 Other

140 China

120 United States

USD billion USD (2019) 100 Europe

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Solar water heaters and biomass boilers Buildings energy efficiency

IEA 2020. All rights reserved. Notes: Includes residential and commercial buildings. Data on biomass boilers do not include furnaces that circulate heat in buildings using air. Sources: IEA calculations based on GMI (2019) and SHC-TCP (2019).

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Heat is moving to the centre of energy and climate policy discussions, though investment trends show divergence among various strategies for enhancing low-carbon heat in buildings

Heat for buildings, including for space and water heating, accounts for If countries were on a path towards full decarbonisation of heat by mid- nearly one-quarter of global final energy consumption. The use in century, we would expect to see growth in each area, with regional buildings of fossil fuels – mostly natural gas and oil – to supply heat differences reflecting different strategies, and a slowdown in contributes around 8% of global CO2 emissions. More than expansions of natural gas grids. In 2019, USD 151 billion was spent on 65 jurisdictions have established or are considering targets for net-zero buildings energy efficiency, compared with around USD 24 billion on emissions by 2050, pushing heat up the policy agenda for many end-use renewables, mainly solar thermal water heaters and biomass governments, especially in the northern hemisphere (IEA, 2019b). boilers. Countries and municipalities have set out different strategies for deep Global heat pump sales continued to grow in 2019, at around 5%, to decarbonisation of heat, using five possible possible approaches: roughly 20 million. China remains the largest market as it seeks to  lower heating demand: invest in more efficient building envelopes; modernise its heat supply. Air-to-air heat pumps in new buildings and major refurbishments are the dominant applications. The European heat  direct electrification: replace fossil-fuel heating equipment with heat pump market has experienced double-digit growth in recent years, pumps, which operate with very high efficiency, supplied by a fully mostly in countries with high shares of electric heat like France, but also low-carbon grid and/or by self-consumption of renewable power; where policy favours them compared to gas and oil boilers. The IEA  gas decarbonisation: replace gas-fired heating equipment with SDS includes a doubling of heat pump sales by 2025 (IEA, 2020c). boilers adapted to hydrogen and boost low-carbon gas delivery Since January 2019, at least six electrolyser projects that aim to blend  direct use of renewables: biomass, geothermal, solar thermal; some of their produced hydrogen into the gas grid for heating have started operation (see R&D and Technology Innovation). One of these,  district heat expansion: replace individual heating equipment with the UK HyDeploy project (0.5 MWe, USD 8.5 million) is injecting connections to an expanded heat network delivering heat from hydrogen into the grid today. At around half a billion dollars per year, renewables, heat pumps and waste heat. investments in biogas and its upgrading to biomethane for the gas grid While some of these measures reinforce one another, others will be are ahead of those in hydrogen, supported by US utility commitments, most effective if all buildings locally adopt the same solution. Deep lower production costs and rising demand for low-carbon gas (IEA, energy efficiency improvements are compatible with all other options. 2020d). District heat investments are the largest at USD 10 billion to However, widespread deployment of district heat or direct USD 15 billion per year in Europe, but not all are in low-carbon sources. electrification may not be compatible with upgrading the gas grid, and However, network upgrades can ease integration of low-carbon heat, end-use equipment, to deliver and consume hydrogen and other low- raise system efficiency and offer valuable flexibility to the power grid carbon gases, unless paired with hybrid heat pumps. (see below).

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District heating networks continue to expand in Europe, with the length of installed pipelines growing by 35% since 2005 and underpinned by investments of USD 6 billion per year

Total operating district heat pipelines in Europe (left) and estimated annual investment in these pipelines (right) 250 10

200 8 Thousand km USD billion USD (2019) 150 6

100 4

50 2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sweden Denmark Germany Poland Romania France Other

IEA 2020. All rights reserved. Notes: Analysis based on published pipeline lengths in all significant European markets. Investment includes capital expenditure on new pipeline material and earthworks, as well as assumed rates of refurbishment. Does not include Russia). Sources: Euroheat & Power (2019); BSRIA (2019), national statistics for Denmark, Estonia, Finland, France, Germany, Italy, Lithuania, the Netherlands,

Norway, Slovakia, Sweden, and the United Kingdom.

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The European district heat supply mix continues to evolve towards more renewable energy, but despite network expansions in some countries the total heat delivered has been quite stable

District heat sales in Europe by fuel source (left) and total installed district heat generation capacity in Denmark (right)

600 30 th TWh GW 500 25

400 20

300 15

200 10

100 5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Other fossil fuels Natural gas Biomass Other renewables and waste Waste heat Heat pump Other IEA 2020. All rights reserved. Note: Does not include Russia. Sources: Euroheat & Power (2019); national statistics for Estonia, Finland, France, Germany, Italy, Lithuania, the Netherlands, Norway, Slovakia, Sweden, the United Kingdom; BSRIA (2019), Danish Energy Agency (2019), IEA (2019c).

Page | 117 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

Modern district heat networks are efficient options for decarbonising heat for buildings, but they can face policy challenges, especially in countries without widespread existing networks

In some countries, investment in district heat – an insulated network interest in district heat. In China, where extensive networks are largely that delivers hot water or steam from co-generation (the combined supplied by steam from coal-fired power plants, heat policy currently production of heat and power) or heat-only sources via pipelines to favours heat pumps, including for the replacement of older electric space heating or hot water users in buildings – has risen and water heaters for district heat. However, three new solar thermal district encouraged more use of low-carbon energy. Per unit of energy, district heat systems were commissioned in Tibet in 2019. In the United States, heat is often a lower-cost way of integrating low-carbon energy for urban plans for reducing emissions from residential heating often focus heating than individual systems. This includes heat from renewables, on individual solutions. However, upgrades of existing heat networks on such as biomass, heat pumps or harnessing heat from industrial university campuses has raised interest, with several long-term processes that would otherwise have been wasted. Including large- contracts signed for network modernisation and integration of lower- scale heat pumps and thermal storage, enabled by digital technology, carbon energy. Even in countries with well-established district heat can also facilitate electrification of heat and provide flexibility to power networks, including some in Central and Eastern Europe, district heat is systems while reducing the capacity they would need to meet peak not always a favoured means of reducing emissions due to the costs of heat demand (see Power section). upgrading legacy systems and the economic integration with fossil fuel The state of district heating varies widely among markets, even those power. with high heat demand. Some geographies, such as northern China, District heating is a major source of buildings heat in Europe, and Poland and Russia, are upgrading legacy systems that supply up to half networks are expanding, even if it is not promoted in all countries. of national residential heat and are integrated with power plants, often Around 60 million people there are served by district heat, which using coal. Other countries, including Denmark, France, Germany and represents 12% of all buildings heat supply in the European Union and Sweden, are expanding district heat systems in urban areas based on over 60% in Denmark and Latvia. In energy terms, this 450 TWh of lower-carbon options such as geothermal, biomass or waste. A third district heat was equivalent to 15% of EU electricity supply. group of countries, including the Netherlands and the United Kingdom, The total installed length of district heat pipelines expanded by one- is aiming to create a new momentum for efficient heat networks in third from 2005 to 200 000 km in 2019. Annual investments in towns traditionally dependent on individual natural gas heating and less pipelines in Europe, including refurbishment, are estimated at around familiar with collective options. The Dutch Climate Act 2019 foresees an USD 6 billion. Four countries – Denmark, France, the Netherlands and increase of district heat by up to 100% by 2030. A UK Green Heat Sweden – account for two-thirds of this. Though data are scarce, Network Fund of GBP 270 million was announced in 2019 for 2022-25. investment in heat supply plants and thermal storage is estimated to be In some countries, a focus on electrification of individual heating, higher than for pipelines, raising total annual investment above that of interest in hydrogen or electricity market conditions have reduced the European natural gas boiler market (USD 11 billion) (GMI, 2019).

Page | 118 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

Investments in district heat systems can offer low-risk regulated returns, but shifting dynamics in power markets, as well as consumption and fuel choices have knock-on effects for revenues

In Europe, over 10 GW of district heat generation capacity has been Heat pumps supply just 1% of district heat in Europe, but additions are added since 2010, reaching 340 GWth. In response to policy incentives being made. An investment decision for a 13 MW heat pump was taken in to increase the use of renewable energy, biomass and municipal waste 2019 in Helsinki, where fossil fuel co-generation is being phased out by have been the focus of much of the investment in new supply since 2029. Shifting electricity market patterns are impacting co-generation 2000. The share of biomass in district heat supplies in Europe has risen plant profitability in countries in the Nordic region due to low power from 10% over 25% in the last 20 years, mostly displacing coal. Heat prices. Investment in gas and coal co-generation plants in Europe has from coal and oil combined fell from a share of around 50% to 27% over fallen around two-thirds, from over USD 6 billion in 2010. These trends the same period, while natural gas remained near one-third. The have tended to favour heat-only supplies, but have not significantly displacement of coal and oil has largely been on a like-for-like basis, changed the average share of co-generation in Europe’s district heat with biomass also providing high-temperature heat, often from supply, which has declined by just 5 percentage points, to 65%. co-generation. Denmark is an example of how investment in modern heat networks

More recently, investment activity has turned to other low-carbon heat- can transform a legacy system. Heat supply capacity rose from 16 GWth only sources. These include geothermal, solar, industrial waste heat and to 25 GWth since 2000, including the addition of 4.5 GWth from low- heat pumps. Three emerging trends are supporting developer appetite carbon sources. The use of lower-temperature pipelines has enabled for these other low-carbon sources of district heat: deployment of so- cities such as Aalborg to add waste heat from a crematorium and a called third- and fourth-generation district heat; rising power system 1.2 MW heat pump in 2020. The share of co-generation in district heat flexibility needs; and depressed wholesale power prices. supply capacity fell from 47% to 40% between 2000 and 2018 in Third- and fourth-generation district heat systems have been developed Denmark. to operate with lower-temperature water (55-80°C), which has lower Financing transactions for district heat increased in 2019 and early distribution losses, can be used directly in homes, and accommodates 2020, with several networks and businesses changing hands, waste and renewable heat more easily. Since 2010, the share of e.g. Fortum announced the sale of four regional district heating non-biomass renewables in European district heat rose from 5% to 9%. businesses, and district heating companies changed hands in Latvia In 2019, a 3.4 MW geothermal plant was connected in Holzkirchen, and Finland. Lyon’s district heating network was refinanced and the Germany, and new projects took final investment decisions in France. refurbishments of two networks in Poland secured project finance. Latvia added 15 MW of solar thermal heat. As these modern systems These indicate that capital is available for these assets that often have have low losses and can manage multiple smaller heat sources, they multi-decade monopoly contracts. However, municipal networks in can “store” energy when renewable power exceeds grid electricity some European countries struggle to finance upgrades; the European demand. Investment Bank is providing EUR 46 million to operators in Poland.

Page | 119 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

More than two in every five cars sold worldwide in 2019 were SUVs, which made up nearly half of all US passenger car sales

Share of SUVs in total car sales in key markets

60% United States

China 50% Global

Europe 40% India

30% South Africa

20%

10%

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IEA 2020. All rights reserved. Notes: Crossover utility vehicles are not included in SUVs. Pickup trucks reported as commercial vehicles (e.g. for fleets) not included. Sources: IEA calculations based on CAAM (2020); IHS Markit (2018); Jato Dynamics (2020); and Marklines (2020).

Page | 120 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

SUV sales accounted for 60% of the global car fleet expansion since 2010, dampening fuel economy improvements and making the challenge of cutting transport emissions harder

When oil demand for passenger cars will peak is hotly debated. It These amounts of avoided oil demand growth would have been larger, depends on the interplay of several factors that are currently in flux: the however, had there not been a dramatic shift towards bigger and steadily improving fuel economy of new cars; the speed of turnover and heavier cars. This shift has led to a doubling of the share of SUVs in car expansion of the fleet; electrification; and consumer preferences for sales over the last decade. As a result, there are now well over ever-larger cars. In 2019, the fuel economy of new internal combustion 200 million SUVs on the road globally, up from about 35 million in 2010. engine cars continued to improve, market expansion slowed globally SUVs account for 60% of the increase in the global car fleet since 2010. and electrification continued, but decelerated. However, other factors In 2019, their share in total car sales topped 40% for the first time, pulled in the opposite direction: lower fleet turnover in mature markets compared with less than 20% a decade ago. meant that fewer inefficient cars were replaced with new cars, and the This trend has been universal and unrelenting. Today, half of all cars market maintained its relentless shift towards large vehicles with sold in the United States and over 35% of the cars sold in Europe are relatively lower fuel economy. SUVs. Oil prices and tax policies have not put off consumers in these To quantify some of these factors, electric car sales rose by 0.1 million regions from buying cars with higher operational costs. In China, as in 2019 while the passenger car market as a whole contracted by elsewhere, SUVs are often considered symbols of wealth and status. In around 4 million sales worldwide, or 5%. Globally, the electric cars sold India, sales are currently lower, but consumer preferences are changing in 2019 are expected to reduce transport oil demand by around as more and more people can afford SUVs, and their share is rising. 50 kb/d. On top of this, the 155 000 electric buses and other Similarly, in Africa, the rapid pace of urbanisation and economic commercial vehicles registered in 2019 could offset a further 10 kb/d. It development is strengthening demand for premium and luxury cars. is hard to quantify the impact of fewer total car sales on oil demand, On average, SUVs consume about a quarter more fuel per kilometre because we do not yet know the balance between delayed than medium-sized cars. The higher share of SUVs was responsible for replacements of vehicles and slower growth in overall demand for car around 500 kb/d growth in oil demand from passenger cars between travel. However, a rough estimate suggests that fewer sales could have 2010 and 2019. While this was more than offset by fuel economy meant foregoing a 15 kb/d reduction in oil demand that would have improvements in other car segments, total savings would have been arisen through fuel economy, as more old cars were replaced with new larger without the higher SUV sales. In some countries, SUVs are not around the world. The replacements of older cars in 2019 likely avoided included in the same fuel economy standards as smaller cars, and up to 150 kb/d of oil demand but this does not compensate for the unless policy makers take into account the shift to SUVs, then this annual increases of over 500 kb/d of road transport fuel demand on counterbalance cannot be assumed in the future. average since 2014, an increase that has been mostly due to putting more cars on the road.

Page | 121 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

Electric vehicle sales growth stalled in 2019, with a drop in Chinese purchases, but the share of EVs continued to climb as the wider vehicle market contracted

Global electric passenger light-duty vehicle sales and market share (left) and total light-duty vehicle sales (right)

3.5 3.5% 100

Million 90 3.0 3.0% 80

2.5 2.5% 70

2.0 2.0% 60 50 1.5 1.5% 40

1.0 1.0% 30 20 0.5 0.5% 10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

China Europe North America Japan and Korea Rest of World Share of total sales IEA 2020. All rights reserved. Notes: Includes passenger cars and passenger light trucks. Includes plug-in hybrids, battery EVs and fuel cell EVs. Share of total sales represents the total sales of EVs in countries listed in IEA Global Electric Vehicle Outlook as a percentage of total passenger car sales in those same countries. The 2020 estimates are based on the assumptions of a gradual global economic recovery and cautious consumer spending behaviour over the rest of 2020. This accounts for government measures in place at the time of writing, notably in China.

Sources: IEA (2020e); IEA (2020f); Marklines (2020).

Page | 122 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

Lower purchase incentives lowered Chinese demand for electric cars in 2019, while European sales grew strongly. So far in 2020, Covid-19 reduced Q1 car sales, with electric cars down 9%

The year 2019 was turbulent for the auto industry, but this is likely to down in 2019 by the reduction of tax incentives for Tesla and GM models appear mild in comparison with 2020. Electric cars (including passenger and uncertainty around the future of fuel economy regulations. battery EVs, plug-in hybrids and fuel cell EVs), for which sales grew nearly Europe was the only major region where electric car sales maintained 70% per year between 2011 and 2018, are strongly affected by these their 2018 growth rate, rising 48% to over half a million for the first time. trends, as well as changes to policy support in key markets. This trend accelerated into April 2020 as EU fuel economy standards By the end of 2019, electric car sales growth had slowed to its lowest tightened and Germany raised its purchase incentives. Carmakers may rate since 2011, with total registrations of 2.1 million, just 6% higher than focus EV sales on Europe in response to a weaker outlook for US fuel 2018. However, electric car sales outperformed the car market as a economy regulations, pushing EU sales closer to the level in China. whole, as total car sales growth slowed in all major regions and turned Despite weaknesses in the global car market, more robust growth of negative in China and the United States in 2019. In China this reflected electric car sales had been expected around the world in 2020. a sluggish economy, low consumer confidence and high household However, Covid-19 related lockdowns severely depressed auto sales in debt. The US market is shaped by replacements of existing cars, and Q1 and Q2 and the industry has been particularly affected by the lost the sales boom in the prior five years meant that fewer consumers revenue. At the time of writing, a drop in global car sales of around 15% needed to upgrade their cars despite the relatively strong economy. In in one year is forecasted, which is dramatic in comparison with the 10% Europe, sales growth would have been flat but for a spike in December drop over two years that followed the 2008 financial crisis. Whether after EU fuel economy rules were clarified. electric car sales follow the scale of this drop depends largely on Changes to purchase incentives also had major impacts. The maximum government policy. In the first quarter of 2020, sales of electric cars subsidy under China’s New Energy Vehicle scheme was halved in July were 9% lower year-on-year, compared with around 25% for the market 2019, to USD 3 700, with an immediate effect: EV sales in July and as a whole. Some analysts, citing concerns about mining disruptions for August were 10% lower than in those months in 2018. At 1.1 million, battery inputs and the possibility that carmakers will delay scale-up of China’s full-year sales were 2% lower than 2018, but still represented electric cars, suggest a significant fall in EV sales in the absence of new half of all sales worldwide. National-level purchase incentives were to policy support (WoodMac, 2020). However, in April Chinese authorities be phased out in 2020, but ambitious EV quotas for automakers and delayed further subsidy cuts to 2022 and some local incentives were other policies were expected to keep sales rising. increased. Continued policy support, especially in Europe, underpins the IEA view that 2020 will see a year-on-year rise in EV sales, including EV sales also declined in the United States, by 10% to 330 000. This was a new record for the share of EVs in total car sales (IEA, 2020f). partly a rebalancing after the bump in 2018 sales that accompanied the launch of the Tesla Model 3. In addition, the US market was weighed

Page | 123 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

Total spending on electric car sales rose 13% in 2019 – a rate much slower than in 2018 – as China cut back purchase incentives and average vehicle prices remained steady

Global trends in the electric passenger light-duty vehicle market

Spending on EV purchases Average price and driving range of BEVs

100 600

500 80

400 60 USD billion USD (2019) 300 40 200

20 100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Government incentives Consumer spending Range (km) Price (hundred USD [2019]) Price per range (USD [2019]/km) IEA 2020. All rights reserved. Notes: Government spending includes direct and tax expenditures on battery-electric vehicles (BEVs) and plug-in hybrid EVs. Spending is inclusive of sales taxes. Government incentives assigned per model in each year based on national policy documents and include tax incentives and transfers to consumers or manufacturers to reduce purchase prices. Non-purchase incentives, such as lower road taxes or parking fees, are not included. Right chart shows averages weighted by sales per model. Ranges converted to Worldwide Harmonised Light Vehicles Test Procedure (WLTP).

Sources: IEA calculations based on IEA (2020d); IHS Markit (2018); and EV Volumes (2020).

Page | 124 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

The government share of electric vehicle purchase costs in 2019 was the lowest to date, potentially signalling a shift to a more sustainable market based on private spending

Encouraged by continued government support, global spending on need for two drivetrains. Their share fell from 50% in 2012 to 27% in electric car purchases grew to USD 90 billion in 2019, a 13% increase 2019, reflecting the higher ranges and availability of BEVs. Electric car compared with 2018. Of this, USD 60 billion was on battery-electric markets are increasingly tilted towards bigger cars. While electric cars and the remainder on plug-in hybrids. The rise in spending was versions of SUVs can be more attractive – due to higher fuel savings lower than in 2018, when around USD 35 billion was added to the and manageable upfront price for buyers of larger cars – the overall global electric car market in just one year, but higher than the growth costs of electrifying a fleet of bigger cars would be higher for in numbers of cars sold. governments and consumers alike. Spending rose faster than sales because of an increased share of As a share of total spending, the contribution of government support global sales from the European market at the expense of China, where declined to 12% after rising slowly for several years. In other words, sales contracted under a slowing economy and reduced policy roughly USD 7 of consumer spending are generated for every dollar support. On average, prices for electric cars are higher in Europe than spent by governments. By correlating vehicle prices, sales data and China, with BEVs 50% more expensive on average globally. support schemes to estimate the value of government purchase incentives (including tax breaks), we estimate that public spending Electric car prices have been relatively stable since 2016, as savings amounted to USD 11 billion. This is USD 2 billion lower than in 2018 from improvements in cost per unit of battery capacity have been despite sales being 7% higher. Reasons include the lower level of passed on to consumers as additional range, not cheaper cars. The subsidy in China and the expiry of US tax credits for Tesla and GM. average range of a BEV sold in 2019 surpassed 330 km. Longer ranges are incentivised by policy in some countries. In China, purchase The ability of governments to reduce their share of total spending will incentives for BEVs with driving ranges below 150 km were phased out be a key test of the sustainability of the electric car market in coming in 2018, and ranges below 250 km became ineligible in 2019. Looking years. Unless government incentives adjust as the market increases, at the average car price as a function of its range shows that by this considerable pressure will be placed on public budgets. Between 2012 metric, the EV value proposition for consumers improved by 12% and 2017, the government share of total EV spending generally rose compared with 2018 and 36% compared with 2015. but there are signs it is declining as policies such as standards, regulations and mandates shift costs from the public sector to Another reason that average prices have been stable is the higher consumers and manufacturers. This trend will likely accelerate as share of large vehicle sales, including luxury sedans and SUVs. A electric cars become more competitive. However, in the immediate partly offsetting factor stems from the lower share of plug-in hybrid future the proposed inclusion of support for EVs in post-crisis stimulus sales, which are generally pricier on a like-for-like basis due to the packages, as well as low oil prices, may put this development on hold.

Page | 125 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

White certificate markets, which support a growing share of energy efficiency investments in several countries, broadly stabilised in 2019 and Q1 2020

Trends in prices for white certificates for energy efficiency in four markets around the world 500 France Italy

Victoria 400 New South Wales

300 Index (January 2014 = Index (January 100)

200

100

Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 Jan 19 Jul 19 Jan 20

IEA 2020. All rights reserved. Notes: France data are a weighted average of fuel poverty certificates and classic certificates, weighted by volume. Dots indicate major policy interventions to change the market rules. These include (from left to right): changes to the eligibility of lighting projects in New South Wales, Australia; reservation of 25% of the French market for fuel poverty certificates; tightening of eligibility criteria in Italy; changes to eligibility of lighting projects in New South Wales and Victoria, Australia; cap on certificate prices in Italy.

Sources: IEA calculations based on Emmy (2019); GME (2019); and TFS Green Australia (2018).

Page | 126 IEA. All reserved. rights Energy end use and efficiency World Energy Investment 2020

White certificates provide an additional source of remuneration for efficiency projects, but their effectiveness in spurring investment depends on appropriate market design

After recent volatility in white certificate markets, price trends in 2019 driven activity among consumers that were not the anticipated and early 2020 have been relatively stable, with some sharp growth in beneficiaries, which were low-income households in France or industrial Victoria, Australia. In France, certificate prices climbed to over consumers in Italy. Policy makers have made corrective market EUR 8/kWh, or 30%, during 2019.3 Increasing price stability following interventions to maintain incentives to invest and limit costs to policy changes in previous years indicates a maturing of market design consumers, which has sometimes resulted in price volatility. from which other jurisdictions could learn. There are over 50 different The French market is in the middle of the 2017-21 trading period, in which energy obligation systems that generate certificates around the world, targets have increased.4 The rising price trend reflects projects higher on most of which do not have a marketplace for trade. the cost curve, e.g. as bulk light bulb replacement opportunities are For more than 15 years, white certificates have allowed energy savings exhausted. Still, the outlook is clouded by ongoing discussions about the from efficiency projects to be traded by obligated parties, generally upcoming period and post-2023, when new targets are set. In Italy, a final energy suppliers, such as electricity and gas retailers. Tradable price cap was introduced in 2018 in response to the peak that followed a markets for energy efficiency reward energy suppliers for undertaking tightening of eligibility criteria. Prices did not fall below the cap of the most cost-effective projects. They provide a financial incentive that EUR 250/toe in 2019. In the two Australian markets of Victoria and New helps to decouple their revenues from demand for their core energy South Wales, prices rose smoothly following adjustment in 2018 to a products and can also support efficiency investment by third-party revaluation of lighting projects. In Victoria, they have rallied in recent providers, including energy service companies (ESCOs). However, months as newly proposed regulations anticipate the phase-out of these market design is more challenging than in other areas of energy. low-cost efficiency projects. Regulators generally have limited advance knowledge about the costs of In 2020, prices are likely to be positively impacted by Covid-19 related energy efficiency projects and the volumes of projects available at restrictions as fewer certificates are generated, as well as ongoing different cost levels. Furthermore, certification systems require sensitive policy processes. Obligations like this may also provide a means for assumptions about demand counterfactuals and additionality. Regulators governments to co-ordinate the delivery of energy efficiency stimulus face a challenge of balancing the robustness of the framework (to avoid goals in co-operation with large energy companies. fraud, gaming or double counting) against the level of administrative burden that may affect political support. In some cases, incentives have

3 French certificates represent a saving over the lifetime of the intervention, beyond a 4 The share of certificates to come from fuel poverty homes was raised for this fourth period, counterfactual of 4% demand reduction. the end of which was extended by one year to the end of 2021.

Page | 127 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Energy financing and funding

Page | 128 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Cross-sector trends in energy finance

Page | 129 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Ahead of 2020, varied financial indicators for energy-related companies

Liquidity and profitability indicators for top-listed energy-related companies

Current ratio (liquidity indicator) ROIC (profitability indicator) 2.0 20% 2018 2019 US median 1.5 15% US market (non-financial firms)

1.0 10%

0.5 5%

Oil and gas Power Electrical Auto Oil and gas Power Electrical Auto supply companies equipment manufacturing supply companies equipment manufacturing supply supply

IEA 2020. All rights reserved. Notes: Current ratio = current assets divided by current liabilities. ROIC = return on invested capital. Includes top 25 listed companies based on sales (top 10 for electrical equipment and automotive), but excludes those in China and Russia. Sources: IEA calculations based on Thomson Reuters Eikon (2020) and Damodaran (2020).

Page | 130 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Equity market pressures have intensified for energy-related sectors in 2020, but more so in those exposed to fuel supply and consumer goods

Market capitalisation for listed energy-related companies (top companies based on sales), as of the end of April

120 Apr-18

Apr-19 100 Apr-20 April 2018 = 100 = 2018 April 80

Oil and gas Power Electrical equipment Auto Global market supply companies supply manufacturing benchmark

IEA 2020. All rights reserved. Notes: Includes top 25 listed companies based on sales (top 10 for electrical equipment and automotive), but excludes those in China and Russia. Market capitalisation is measured at the end of April for each year. Global market benchmark = FTSE All-World equity index.

Source: IEA calculations based on Thomson Reuters Eikon (2020).

Page | 131 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Borrowing costs have risen for a number of companies, even as benchmark rates fell in the United States and Europe, and a number of emerging economies face tighter credit conditions

Weighted average cost of long-term debt for top energy companies (left) and government 10-year bond yields (right)

12% 12%

10% 10%

8% 8%

6% 6%

4% 4%

2% 2%

0% 0%

-2% -2% Apr 18 Oct 18 Apr 19 Oct 19 Apr 20 Apr 18 Oct 18 Apr 19 Oct 19 Apr 20 Oil and gas supply Power companies United States Germany China Electrical equipment Auto manufacturing India South Africa Indonesia

IEA 2020. All rights reserved. Note: Includes top 25 listed companies based on sales (top 10 for electrical equipment and automotive), but excludes those in China and Russia. Source: IEA calculations based on Thomson Reuters Eikon (2020).

Page | 132 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Emerging financing and funding pressures raise new risks to energy investment…

Recent events have brought a repricing of risk across the global timing and nature of economic recovery is also pressuring profitability, economy and to the energy sector in particular. Energy investments which shapes future funding capacity. Coming into 2020, indicators for face new risks from both a funding – i.e. how well project revenues and energy-related industries trailed market benchmarks in these areas. earnings can support new expeditures on corporate balance Early observations suggest higher risks around certain segments. sheets – as well as a financing perspective – i.e. how well debt and Over the past two years, the market capitalisation of the top-listed oil equity can be raised to supplement corporate and government funds. and gas companies declined by nearly 50%, with most of the fall These are most apparent from the estimated declines in revenues coming in the past year, as investors reassessed risks and profitability facing both the oil and gas and power sector in 2020, as well as expectations in the face of lower oil prices, emerging oversupply and equipment and goods suppliers (see Overview), exacerbated by uncertainty over how well companies can position themselves in a financial market volatility and a slowdown in project finance changing market environment. These risks are also reflected in an transactions and mergers and acquisitions. The cost of money has risen increase of volatility compared with the wider market, as expressed by for most actors save for mature market sovereigns, whose bond yields a higher beta, which was rising even before the recent crisis took hold. have fallen. The ability to price and structure financial deals remains For some segments, such as US shale producers, which rely on debt challenging due to strong market volatility as well as the physical markets to finance operations, the knock-on effects from much lower situation of industry professionals. Near-term liquidity constraints and oil prices have resulted in much higher borrowing costs and near-term growing risk of defaults across the economy also cast uncertainty, with liquidity constraints for a number of companies. For better capitalised many companies and investors opting for capital discipline over players (e.g. the Majors) financial developments have forced companies financing new transactions. to cut capital spending; dramatically re-evaluate investment plans, and There are questions over how short-term market volatility will affect the in some cases dividends; and look to debt markets to help fund industry landscape and investment decisions. Like the wider economy, shareholder commitments (see “Sectoral trends” section below). the financial conditions for energy-related companies have changed in The financial situation is varied for the power sector, where the top- 2020, in particular with top companies experiencing falls in market listed companies have seen a loss in market capitalisation of only capitalisation steeper than those of equity benchmarks. While falling around 5%. Some buffer is provided by the more predictable revenues share prices more directly impact investors, they provide a signal of for utilities from regulated networks and renewables, where expectations for profitability and increase the cost of issuing equity. investments are increasingly focused, while many power producers in In the near-term, the challenges concern liquidity – sufficient cash flow competitive markets have hedged some merchant exposure a year to keep businesses operating and meeting obligations with customers ahead (Rack, 2020). Renewable developers also came into 2020 with and suppliers. Shifting market fundamentals and uncertainty over the improving performance.

Page | 133 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

… but financial markets can also amplify supportive factors for energy investment

That said, declines in power demand, uncertainties over future pricing This raises questions over the turnover of the vehicle fleet as well as the for wholesale market generators and exposure to gas distribution as continued roll-out of more efficient vehicles and EVs, particularly in the part of utility business models raise new funding challenges. Borrowing face of much lower fuel prices (see Energy End Use and Efficiency costs have also risen and utilities face credit risks from non-payment by section). customers under financial stress. For European utilities that had already The financial markets can play an amplification role for energy seen earnings erode over the past decade in the face of lower demand, investment on both the downside and the upside. While uncertainties the financial picture is more shaky, while US utilities entered the crisis abound in the near term, conditions may be ripe for refinancing and on firmer footing. Some state-owned utilities in emerging economies acquisitions that can help lower the cost of finance and improve the that borrowed heavily in foreign currency now face ballooning debt confidence of developers to invest, knowing that they can quickly obligations, with potentially less relief available from government recover their capital. Such opportunities have increased in recent years coffers. Given long capital cycles for power, shifting financial and could now become more attractive for institutional investors conditions appear to have less of an impact on current capital spending searching for yield with risk appetite for assets, such as renewables, compared with oil and gas (see Power Sector section), but the financial energy infrastructure and other capital-intensive technologies with risks vary considerably by market and segment. reliable revenue profiles. They may also be reinforced by some of the Players in the electrical equipment supply chain – which helps to longer-term preferences expressed in the market for allocating capital provide everything from turbines to grid components to energy towards sustainable finance opportunities. Further discussion of these management systems – may face more challenging financial conditions dynamics are found in the sections below on the “Role of institutional than project developers. With economic uncertainties, some investors in energy investment” and “Sustainable finance and energy governments and utilities are delaying procurement of power projects, investment”. which means reduced order books and cash flow for suppliers, though Private decisions to invest will of course also depend on the evolution there may be an opportunity to focus on repowering existing assets and of the current crisis and actions taken by governments to support adopting more flexible payment terms. Consolidation pressure on markets. For example, while investors have increased their focus on smaller renewables manufacturers with weaker balance sheets may sustainable finance in recent years, there are questions over the clarity accelerate, while larger players may be able to weather the storm with of energy policy signals and alignment of financial policies that would cost cutting. better channel financial flows to real sustainable assets. Moreover, in Finally, automakers also face a much more uncertain financial picture markets and sectors where investment risks remain relatively high, the with a steep fall-off in sales in the first months of the year and a more risk-taking capacity of public finance institutions may play an

than 30% loss in market capitalisation, second to that of oil and gas. increasingly important role.

Page | 134 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Have investments in renewables companies performed better than those for fossil fuels?

Despite growing cost-competitiveness, which has supported rising measures, and development, may be required to prepare the industry deployment for solar PV and wind over the past decade, renewables for fully-fledged support from listed equity markets. How quickly this investments are not expanding at the rate needed to align with occurs, and whether existing norms in the investment industry will sustainability goals. They would need to more than double over the adapt to the funding needs of a relatively new asset class, are key next decade. That said, decisions to allocate capital towards different questions for further study. mixes of fuels and technologies depend a lot on financial performance, Total equity return for US and Europe companies by sector taking into account not just returns, but the level of risk as well. 140 The IEA and Imperial College London are investigating the risk and return proposition available to investors in the energy sector through a 120 series of special reports. The first study focuses on historical financial

performance of fossil fuels versus renewable power in listed equity USD Billion 100 markets of select advanced economies.We constructed hypothetical 80 investment portfolios to compare fossil fuel and renewable power business segments in three geographies: the United States, the United 60 Kingdom, and Germany and France. The methodology described in the report will be extended to other countries and unlisted (i.e. private 40 market) investments in forthcoming work. 20 The findings indicate that renewables shares in these markets over the past decade offered higher total returns relative to fossil fuels, with lower annualized volatility (a measure of investment risk). Over January- Jan-20 Feb-20 Mar-20 Apr-20 May-20 April 2020 renewable power companies held up better than fossil fuel Renewable power Fossil fuel supply S&P 500 companies during a period of severe stress and volatility. Notes: Includes companies with market capitalisation of at least So why has the apparent financial attractiveness of renewable power in USD 200 million in the Bloomberg Industry Classification Systems. Fossil equity markets not resulted in a more pronounced reallocation of fuels = oil and gas (exploration and production, integrated oils, investor capital? One reason is that the characteristics of a dedicated midstream, services and equipment, refining and marketing) and coal renewable power portfolio are substantially different from those of pure operations; Renewable power = project developers and equipment play fossil fuel portfolio. These characteristics (such as average market manufacturers, green utilities (>50% of revenues from renewables) and capitalization, dividend pay-out ratio, firm capital structure, and yieldcos. liquidity) matter a lot to large institutional investors.. Additional Source: IEA and Imperial College (2020).

Page | 135 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Though somewhat lower since 2015, state-owned enterprises continue to play a big role in energy investment, particularly in fossil fuel-based sectors and networks

The share of government/SOE ownership in global energy investment by sector, 2015 and 2019

70% 2015

2019 60%

50%

40%

30%

20%

10%

Page | 136 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

State-backed ownership plays a much greater role in developing economies, where market structures are more regulated and the cost of capital is higher

The share of government/SOE ownership in energy investments by economy type and sector in 2019

100% Advanced economies

80% Developing economies

60%

40%

20%

Page | 137 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

SOEs that borrowed heavily in foreign currency may now face a debt “maturity wall”

Outstanding bonds by currency denomination and recent exchange rate movements for key SOEs and emerging economies

Bonds outstanding to operating income (maturing 2020-23) Currency change vs USD (1Q2020)

3.0 30 South Africa Ratio 2.5 25 Brazil USD Billion 2.0 20 Mexico

1.5 15 Russia

1.0 10 Indonesia

Argentina 0.5 5 India

Eskom Pemex NTPC PLN Petrobras China (S. Africa) (Mexico) (India) (Indonesia) (Brazil)

Domestic currency Foreign currency Outstanding (right axis) -30% -20% -10%

Page | 138 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Weakening SOE finances raise investment risks, and uncertainties over the role of state actors

The share of private-led energy investment, in terms of ownership, has more important. This share is still higher than before the oil price increased since 2015. There has been a growing role for renewables, collapse in 2014 as large private oil and gas companies, including the where private entities own nearly three-quarters of investments; major oil companies, cut back spending more heavily in 2015 and energy efficiency, which is dominated by private spending; and 2016, a trend likely to be reinforced with the downturn in 2020. private-led spending in grids and battery storage. But state-led Given an expected downturn for global energy investment in 2020, investments have remained relatively robust in certain sectors, such additional questions are emerging over how the role of NOCs and as oil and gas and fossil fuel-based generation. Overall, the SOE share SOEs will evolve. Private actors, at least in oil and gas, have borne the of energy investment was 36% in 2019, down from nearly 40% in 2015. brunt of capital cuts thus far, and SOEs may also be a vehicle for some SOEs account for nearly 40% of power investments, though this share governments to carry out fiscal stimulus measures. Still, some has fallen since 2015, from lower spend by Chinese SOEs in coal-fired indebted and poorly performing NOCs are also being hit very hard by generation and networks. In some emerging markets outside China, the current crisis, with knock-on effects on host governments that rely the role of SOEs in power investment increased, with more resilient on oil and gas revenue to provide essential services (see Fuel Supply investment in fossil fuel generation by SOEs, compared with private section). actors, notably coal plants in India and South Africa and gas plants in In 2020, a repricing of country risks in some developing economies North Africa. SOE investment in coal plants in Poland also increased. led to rising government bond yields and falling currencies. SOE Electricity sector investment by the private sector and consumers financing is often tied to the sovereign entity guaranteeing the debt, declined less than that of SOEs over 2015-19, mainly due to more and so sharp declines in emerging market bond prices means rising resilient investment in renewables and a higher share of grid spending financing costs. South Africa has lost its last investment grade rating in markets with investor-owned utilities. This was reinforced by a rise on its credit. Compounding the situation, a number of SOEs in distributed solar PV and an increase in consumer spending on (e.g. Eskom, Pemex, PLN, Petrobras) have borrowed heavily in foreign energy efficiency, helping to boost the total private share. Notably, in currency and now face debt repayments some 15-30% higher in emerging economies, private actors play a predominant role in domestic currency terms, alongside more uncertain revenues from renewables investment (except hydropower, where state players changing market conditions. dominate), but their projects typically sell to state-owned utilities. In the near term, governments may find themselves stepping in to In upstream oil and gas, the share of NOCs in investment remained shore up SOE finances, particularly through providing liquidity, over 40% in 2019, though spending in the Middle East and Russia, refinancing and foreign exchange reserves to meet growing debt where NOCs dominate, increased less than in other parts of the world, challenges. But reduced fiscal capacity and higher borrowing costs notably in the United States and in shale, where private companies are from the crisis may also hamper their ability to respond.

Page | 139 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Sectoral trends in energy finance

Page | 140 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Over time, oil and gas majors improved their financial position by cutting costs, deleveraging and boosting free cash flow, but trends have shifted sharply in 2020

Majors’ indicative sources of finance and free cash flow

50 Change in equity 40 Asset USD billion sales 30 Change in debt 20 Free cash 10 flow

-10

-20 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2012 2013 2014 2015 2016 2017 2018 2019 20 IEA 2020. All rights reserved. Notes: Free cash flow is cash flow from operating activities less capital expenditure. It excludes changes in working capital. Majors = BP, Chevron, ConocoPhillips, Eni, ExxonMobil, Shell and Total. Sources: IEA calculations based on Bloomberg (2020) and Thomson Reuters Eikon (2020).

Page | 141 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

High-dividend yields and share buybacks have been part of the Majors’ financial strategy, but there are questions over these practices in a changed market environment

Dividend yield for Majors and globally listed companies by selected sector (2015-19) and dividend coverage ratios for Majors Dividend yield Dividend coverage based on free cash flow (Majors) 8% 3.0 Ratio 2.5

6% 2.0

1.5 4% 1.0 Global market average 0.5 2%

0.0

-0.5 Majors Utilities Financials Industrials Tech. & 2015 2016 2017 2018 2019 Q1 2020 comm.

IEA 2020. All rights reserved. Notes: Tech. & comm. = technology and communications. The charts include all listed companies in the world with over USD 10 billion of market capitalisation. The dividend yield is the average weighted with market capitalisation in each year. The dividend coverage ratio is defined as free cash flow divided by dividends paid.

Sources: IEA calculations based on company filings and Bloomberg (2020).

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In 2020, companies face a new stress test in finding the right balance between delivering oil and gas, maintaining capital discipline, returning cash to shareholders and investing for the future

Companies across the oil and gas sector now face an unprecedented Many Majors have diversified spending into non-core areas: renewables stress test – in their business strategies, operations and financial and other clean energy technologies now account for up to 5% of their models – from a sharp demand shortfall from the current economic capital expenditure, and they are also acquiring existing non-core crisis and a supply overhang (see Fuel Supply section). The sector as a businesses, for example in electricity distribution, electric vehicle whole faces the prospect of a smaller and more competitive space charging and batteries, while stepping up research and development within which to operate, though the financial implications and activity. However, these areas are not at the scale or profitability to strategies vary strongly by type of company. Here we discuss the provide much of a financial buffer in the current crisis. choices faced by oil and gas Majors in balancing investment priorities Providing high-dividend yields and share buybacks have historically with new financial pressures – to weather the current downturn and been features of their financial strategies and ways to keep investors in position future energy portfolios. The situation of US Independents is the fold. The Majors took on additional debt in the 2014-16 downturn to also treated below. continue to pay cash dividends, and they also offered payment in By the end of 2019, Majors had greatly improved financial performance additional shares (so-called scrip dividends), and over 2018-19 they relative to the previous oil price downturn, employing a combination of bought back over USD 30 billion of equity. cost-cutting and activity delays, careful project selection, asset sales, But in today’s market, traditional financial strategies may now be less and paying down debt. Companies also looked to the oil services and effective. Equity returns for the majors underperformed the broader equipment sector to lower margins, which supported a reduction in market over 2015-19, and in the first quarter of 2020 declined sharply. upstream costs some 20% below 2014 levels. However, this position Dividend coverage ratios have declined to low levels. Some companies has reversed sharply in the first quarter of 2020, with free cash flow have taken the dramatic step of cutting dividends – to date, Shell and reverting back to 2017 levels and companies significantly increasing Equinor (an NOC) have announced two-thirds cuts to quarterly payouts. debt issuance to cover obligations. The financial position is likely to Several Majors, including Chevron, Eni, ExxonMobil and Total, have worsen as the full brunt of sharply declining revenues is felt through the announced the suspension or paring of share buyback programmes. course of the year. Moreover, there is relatively little scope this time Recently, several companies raised over USD 30 billion from debt around for further cost-cutting as most of the available savings have markets to shore up liquidity and maintain commitments to already been made. shareholders. While the Majors are uniquely positioned to exercise this At the same time, the Majors have also faced growing pressure from option compared with smaller companies, some have witnessed credit investors, reflecting near-term economic stress, but also growing downgrades that may make borrowing more expensive over time. climate risk concerns by the financial community (see below).

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Oilfield service and equipment providers face huge financial challenges

The financial performance of oilfield service and equipment (OFSE) While already under pressure from the previous downturn, the current providers, already weakened over the past five years, is seeing a new market situation may further reduce diversity among service wave of challenges as producing companies cut costs in reaction to the providers. Baker Hughes announced debt restructuring and Diamond current downturn. During the oil price decline in 2014-16, profit margins Offshore Drilling filed for bankruptcy while Weatherford International for service providers shrank from relatively comfortable levels and was delisted. They may not be the last companies to do so as the declined below that of the Majors as operators shelved projects and dynamic landscape of the service sector evolves in the downturn. renegotiated contracts. Production companies adjusted design EBITDA margins by oil and gas company type strategies, moving away from bespoke to supplier-standard offerings that could be delivered for less cost and with shorter lead times. 25% This trend fed into a period of increased industrial consolidation, including mergers and acquisitions and notable bankruptcies in 20% several sub-sectors. Larger players took advantage to diversify their portfolios across value chains with Schlumberger acquiring Cameron, Technip merging with FMC, and Baker Hughes and GE combining 15% forces. The engineering, procurement and construction sub-sector was particularly affected, marked by historically high debt ratios, restructuring and government bailouts (e.g. Daewoo Shipbuilding and 10% Marine Engineering [DSME]). Additionally, contracting strategies have trended to putting increased financial risk onto contractors and shortening contract lengths, resulting in service companies’ reduced 5% ability to hedge income far into the future. Supply chain challenges manifested themselves early in the current pandemic, and service companies quickly adjusted staffing rotations 2011 2012 2013 2014 2015 2016 2017 2018 2019 and supply options where possible. OFSEs, particularly those exposed Majors OFSEs to the US shale market and drilling cutbacks, have announced capital expenditure cuts upwards of 31% in 2020. They have supplemented IEA 2020. All rights reserved. these cuts with cash saving measures, including stopping or reducing Note: EBITDA = earnings before interest, taxes, depreciation and dividends, salary cuts, and the furloughing or laying-off of staff. amortisation.

Page | 144 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

US shale producers now face more extreme near-term funding challenges

Option-adjusted credit spread for US high-yield energy sector corporate bonds and crude oil price

2 500 160 Option-adjusted spread 140 WTI crude oil

2 000 USD/barrel price (right axis) Basis points 120

100 1 500

1 000 60

40 500 20 Jul 14 Jul 15 Jul 16 Jul 17 Jul 18 Jul 19 Oct 14 Oct 15 Oct 16 Oct 17 Oct 18 Oct 19 Apr 14 Apr 15 Apr 16 Apr 17 Apr 18 Apr 19 Apr 20 Apr Jan15 Jan16 Jan17 Jan18 Jan19 Jan20 IEA 2020. All rights reserved. Source: IEA calculations based on Bloomberg (2020).

Page | 145 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Shale fundamentals are set to reverse sharply in 2020

US tight oil production, investment and free cash flow

160 8 Free cash flow

mb/d Capex

USD billion 120 6 Production (right axis)

80 4

40 2

0 0

-40

-80 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Sources: IEA calculations based on company filings, Rystad Energy (2020), and Bloomberg (2020).

Page | 146 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Investment cuts, financial restructuring and a changed industry landscape for independents

The small and medium-size independents that make up the US shale persistent financial distress (Haynes and Boone, 2020). One of the sector are among the most financially exposed to the current economic larger independent players Whiting Petroleum filed for bankruptcy in crisis and the supply shock in oil markets. They face a short-term credit April, and others have been early to announce restructuring in 2020 as crunch and also have reduced scope to increase productivity by cutting the process continues across much of the sector. costs compared with the past. Efforts to find the most productive areas of shale basins, adopt new For the shale industry, at an oil price of USD 30/bbl or less, the outlook technologies and expand infrastructure enabled US shale companies to for many highly leveraged companies looks bleak (see Fuel Supply double production over the past five years while continuing improving section). Despite improving finances and efforts to pay down debt over capital efficiency 40% since 2015. But the ferocity of the crisis in 2020 the past four years, which resulted in reduced risk premiums, the has been well beyond the contingencies that the industry had planned sector’s exposure to high-yield bonds and a subsequent run-up in credit for. In addition to the price risks (against which many players had spreads in that market effectively closed a vital funding channel in early hedged), the industry was also faced with acute logistical difficulties as 2020. Companies are trying to extend bond maturities and keep demand plummeted in April and available storage filled up. revolving credit facilities open, but banks are also cutting exposure. A Due to the steep nature of unconventional well declines, often on the number of players have announced credit downgrades, bankruptcies, order of 60% in the first year, activity reductions are set to result in redefinition and debt restructuring as reassessments of reserved-based production losses, especially as they are accompanied by widespread lending and cash flow expectations continue. well shut-ins. In 2020, the free cash flow position of shale companies is set for its The shock of 2020 does not spell the demise of shale or of independent worst year since 2015. Companies have announced significant cost- operators, particularly given the sector’s ability to ramp up quickly with cutting and capital reduction measures. For example, Occidental higher oil prices, but will likely result in a dramatic restructuring of the Petroleum, with its heavy debt load since acquiring Anadarko Petroleum industry landscape, including consolidation among players with well- in 2019 for USD 38 billion, announced capital expenditure cuts of 54%, located resources. in addition to operational cost and dividend reductions. But opportunities to extract greater operational efficiency, as was achieved Looking beyond 2020, and even if oil prices recover back to 2019 in the past by working with OFSE companies, are more limited in the levels, investment and the journey towards a more sustainable business current crisis. model may depend on companies considering further innovation or efficiencies to reduce costs, or improve ultimate recoveries. Shale bankruptcies have continued from last year, with exits at a similar

level to the immediate aftermath of the 2014-15 downturn, indicating

Page | 147 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Coal power investment decisions continued to fall, and depend mostly on state-backed finance

Final investment decisions for coal power

Coal power FIDs by financing mechanism Project finance coal FIDs - sources of finance 100 100% GW

80 80%

60 60%

40 40%

20 20%

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Balance sheet-SOE Balance sheet-private sector Equity-SOE Equity-private sector Debt-public finance Debt-commercial Project finance IEA 2020 All rights reserved. Sources: IEA calculations based on McCoy Power Reports (2020) for FID capacity levels and IJ Global (2020) and World Bank (2020) for sources of project finance.

Page | 148 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

As commercial actors announce new restrictions, coal power finance relies on fewer sources

Coal power FIDs have plummeted in recent years – stemming from of smaller plants in recent years, while local economic and employment excess capacity and declining utilisation rates in some markets factors provide incentives to continue investing in new ones. (e.g. China, India), and increased renewables and (in China) gas role in Project finance structures have accounted for a fifth of coal power FIDs, the energy mix. At the same time, the pool of capital for new and state-backed sources of finance made up over half of these deals developments has shrunk and financing terms have become more since 2016. Transactions have been highly leveraged over 80% debt. strict. Well over 100 financial institutions globally have announced The three largest debt providers globally (who also provide guarantees), restrictions on financing coal (IEEFA, 2020).5 Yet a large construction accounting for 35% of project debt, have been development banks and pipeline persists, facilitated by availability of state-backed equity, debt export credit agencies from China and Japan. A mixture of commercial and guarantees, as well as long-term contracts in some Asian markets. banks from Asian countries, Chinese policy banks, and export credit Since 2016, state-backed sources (including SOEs and public financial agencies from India and Korea have also featured among recent major institutions) have accounted for over 60% of the financing of new coal lenders. power. The majority of this stems from SOEs building new plants on Several commercial debt providers that were still financing in 2019 balance sheet in China, but also in India and Indonesia. A mix of private have signalled intentions to step back from the sector. Two major actors (power companies and industrial companies) have also taken Japanese banks – Mizuho and Sumitomo Mitsui – announced investment decisions in these markets, as well as in other emerging restrictions to lending for new coal plants in April of this year. Mizuho’s Asian countries, Japan, Korea and the Middle East. announcement came in the wake of a shareholder motion filed against Some challenges have emerged for SOEs in the largest markets. the bank (the first climate-related resolution faced by a publicly traded Chinese power companies are increasingly burdened by heavy debt company in Japan), pointing to the influence of investor pressure. All levels, and India’s thermal generation has come under increased this raises questions over the degree to which public sources may financial stress with slowing demand and insufficient reforms to the continue to fill the gap. Through March, only one new coal power FID distribution sector. Developments in 2020 exacerbate these trends. In based on project finance emerged for 2020, in Pakistan, though all Indonesia, the state-owned utility – already facing financial challenges – project approvals were over half that for 2019 (see Power Sector has seen debt burdens rise from a combination of currency section). depreciation and a large share of borrowing in foreign currency. It remains to be seen how changing financial dynamics will affect expansion plans, and in some cases power companies may choose to retire less efficient assets. In China, companies have shelved a number

5 See chapter 5 of IEA (2019b) for fuller discussion on coal divestments.

Page | 149 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Following several years of renewed growth, and a shift towards renewables, power sector project finance transactions have fallen sharply in 2020

Project finance transactions for power, by year of financial close By region By technology 100 100

80 80 USD billion

60 60

40 40

20 20

2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 (YTD) (YTD) North America Europe Coal power Gas power Solar PV Asia Latin America Onshore wind Offshore wind Other renewables Middle East North Africa Sub-saharan Africa Grids and storage IEA 2020. All rights reserved. Notes: 2020 (YTD) = year to date January–April. Includes disclosed transactions. Source: IEA calculations based on IJGlobal (2020).

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Ahead of 2020, the largest developers of renewable power had broadly improved profitability, with manageable leverage, but capital expenditures have not grown in line with earnings

Financial performance metrics for top 30 listed renewable power project developers (excluding Chinese companies)

Return on invested capital Capex to EBITDA Net debt to EBITDA

10% 100% 5

8% 80% 4

6% 60% 3

4% 40% 2

2% 20% 1

2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

IEA 2020. All rights reserved. Note: Includes the top 30 listed project developers (including utilities, independent power producers and manufacturers) by capacity, excluding those in China and hydropower. Source: IEA calculations based on Thomson Reuters Eikon (2020).

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Over 10% of utility-scale solar PV and wind investment is now based on corporate PPAs, but associated capital spending is likely to decline for the first time in 2020

Renewables investment based on corporate power purchase agreements By geography By technology

15 USD billion USD (2019)

2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020 United States Mexico Europe Australia India Other Wind Solar PV

Page | 152 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Potentially greater near-term reliance on developer balance sheets to fund renewables projects

Most of renewables investment is carried out on the balance sheets of have strategies, beyond subsidies, for solar PV and wind projects to developers; in recent years project finance transactions (including manage revenue risks and merchant pricing exposure (IEA 2019d). non-recourse bank debt) have grown, especially for utility-scale solar Corporate PPAs have emerged to fill this role, and with associated PV and wind, following a dip in 2016. Such project finance transactions investments over USD 18 billion in 2019, were the largest commercial rose to over USD 50 billion 2019, reflecting ongoing risk management arrangement for renewables to manage market risks. Two-thirds of efforts for renewables. In 2020, transactions fell to low levels, placing activity was in the United States, where corporate PPAs complement increased importance on developer balance sheets to fund new tax credits that are being reduced over time for new plants. Investment projects. rose in Europe, where five deals linked to offshore wind were made in As costs have declined and policies have supported deployment, the 2019 (Belgium, Germany and the United Kingom), Sweden led onshore largest developers of renewables have become more profitable with wind, and Spain has emerged as the largest solar PV market. India was returns on invested capital rising, though with slowing momentum in the third largest geography, reaching over USD 0.8 billion. Companies 2019. Leverage levels (net debt to EBITDA ratio) have edged up but signing PPAs continued to diversify from IT players (e.g. Google, remain manageable (below 4-5), indicating adequate liquidity and Facebook, Amazon, Microsoft) to consumer (Wal-Mart, Starbucks) and credit positions. Still, capital expenditures have not grown in line with resource actors (e.g. BHP Group, ExxonMobil). earnings, suggesting that companies may be increasing holdings of Corporate PPAs may become more important as a tool to manage cash, relative to investing, in the face of policy and market uncertainties market risk and as non-energy corporations increase ambition to in some areas. Despite supportive conditions heading into 2020, with directly source renewables. Still, there are questions over how the PPAs the recent downturn some developers face the prospect of lower (which are moving towards shorter tenors) evolve to satisfy more earnings, rising debt, pressure to increase capital discipline and buyers, and provide adequate risk management amid changing market payment and project delays in some markets (see Power Sector conditions. Further effort is needed to scale them in emerging section). There are also questions over pricing of external finance, such economies, where frameworks have been less accomModating. as tax equity in the United States. In 2020, spending on corporate PPA projects is likely to decline with Government and market responses will likely influence the financial lower power demand and prices, and credit and profitability issues position of the industry, as well as the reemergence of project finance among corporates. While they remain economically attractive (a recent markets. Renewables investment largely depends on policies and deal in Spain was struck at less than USD 40/MWh) and provide contracts that help manage price risks and there continues to be a diversity in terms of procurement options, off takers may also become global movement towards long-term contracts awarded via competitive less able to enter into long-term contracts under current market auctions (IEA 2019a). But with evolving policy conditions in competitive uncertainty. power markets, developers and financiers are increasingly required to

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Applications and services related to grid-scale battery storage installations have diversified…

Battery storage projects by application (left) and electricity storage FIDs and type of finance (right)

Installations by application Storage FIDs by source of asset finance

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

2015 2016 2017 2018 2019 2015-16 2018-2019 Grid & ancillary services Capacity provision Hybridisation with renewables Demand shifting & bill reduction Project debt Equity Microgrids Demonstration IEA 2020. All rights reserved. Notes: Sources of asset finance are based on disclosed transactions for energy storage and some projects are hybridised with renewables capacity; a small amount of reported guarantees are included in project debt. Source: IEA calculations based on Clean Horizon (2020) for applications and Clean Energy Pipeline (2020) for type of finance.

Page | 154 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

…while equity finance for storage predominates, the contribution of project debt has grown over time

Stationary battery storage investment has risen above USD 4 billion (see Public sources of finance have played an instrumental role in facilitating Power section), supported by targets and policies that pay for the value of investment decisions in some markets. For example, in Australia, most storage, but financing new projects can be a challenge, given the diversity projects have benefitted either from debt provided by the Clean Energy and complexity of business models. Finance Corporation and Australian Renewable Energy Agency (ARENA) or Grid-scale storage depends on the ability to monetise revenues from various equity from Australian state governments and ARENA. The European Investment Bank (EIB), European Bank for Reconstruction and Development services to consumers and system operators, as well as from avoided grid and the World Bank have been active in providing debt (and technical investment. Applications have diversified over time; in 2019, installations were mostly based on expectations to provide grid and ancillary services and assistance) around the world. State-backed finance is also important for electricity storage outside of batteries – in 2019, two sovereign wealth support renewables integration (through hybridisation allowing variable funds – GIC in Singapore and the Abu Dhabi Investment Authority – provided renewables plants to operate more like dispatchable power). A smaller share equity for a pumped-hydro project taking final investmend decision in India. went to demand shifting and bill reduction, followed by capacity provision. Project revenues often come from a combination of contracts and regulated In contrast to the financing models for grid-scale storage, behind-the-meter and market pricing. Private-sector actors have financed most projects. But storage is more linked to that of distributed solar PV. Most such installations commercial debt remains limited for projects with short contract periods or are financed from the balance sheets of consumers and companies, often based solely on wholesale market sales. supplemented by loans, or through equipment leases and PPAs, where third Uncertainties over these revenues can make it difficult to secure financing in parties (e.g. energy service companies [ESCOs], see below) install and retain ownership of the asset. Both models depend on significant upfront capital, some markets, particularly project debt from banks, and there are not which is recovered through electricity bill savings and other remuneration. enough standalone battery storage projects with cash flows and scale attractive enough to take advantage of available capital. Developers tend to In general, the financing case depends on the contractual backbone for favour projects with short payback periods. For projects taking FID over 2015 revenues, consumer credit quality and local factors (e.g. electricity pricing and 2016, most finance was estimated to came from equity sources, reflecting the time value of storage). In Germany, development bank KfW has predominantly the balance sheets of developers. The contribution of debt provided concessional finance to installations integrating battery storage, has recently increased for projects taking FID in 2018 and 2019, with lending and several aggregators have emerged offering solar PV and battery systems on the rise particularly in Australia, the United States and some European on a PPA basis. In emerging economies, credit for consumers and small markets. This likely reflects availability of suitable price contracts, some companies is more constrained and electricity tariffs tend to be distorted increased comfort of banks with the risks, and efforts of developers to more by subsidies, making financing distributed assets more challenging improve due diligence and structure projects that satisfy cash flow and there. reserve requirements.

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The ESCO market grew by 5% in 2018, though remains geographically concentrated

Energy service company market revenues, by geography

40 Other

Europe

30 United States USD (2019) billion billion USD (2019) China

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Revenues may suffer in 2020; supportive policies and financing are key to continued benefits

ESCOs provide efficiency and distributed services that are funded equipment leasing, and Energy Efficiency Revolving Fund, providing primarily by energy savings. Their contracting, financing and payment low-interest loans for bank on-lending, have helped boost activity there. models enable consumers (mostly commercial and industrial actors) to Government policies and procurement remain key drivers of ESCO overcome the upfront capital burdens of investing in energy assets that activity. Many ESCOs are public entities or backed by governments, may not be part of core business. meaning they could function as effective conduits of public funds to The latest IEA survey shows that global ESCO revenues reached stimulate local spending and employment in ways that deliver long- USD 33 billion in 2018, up 5% from the prior year and 31% since 2015. term structural benefits. Around half of global ESCO revenues come Much of this growth has occurred in China, the largest market by far, from public sources, with shares as high as 85% in the United States but as the Chinese market has slowed so has global growth. and 70% in Europe. In the United States, contracting by municipalities particularly benefits from financing through tax-exempt bond issuance. Outside China, the other major markets of Europe and the United States In China, policy incentives have driven ESCO engagement much more have been relatively stable. In Europe, the role of ESCOs varies with private actors, which account for 90% of revenues. substantially by country, reflecting differences in how EU energy efficiency directives have been implemented. Markets that have grown Globally, most customers continue to pay for ESCO services on the significantly include Belgium, Denmark, Italy, Slovenia and Ukraine, basis of energy performance contracts that deliver guaranteed energy while the German market, one of Europe’s largest, has stagnated. savings. These contracts are complemented by new financing Recent clarification of accounting rules for energy performance approaches in some markets. In some US states, property-assessed contracts in 2018, allowing governments to record them off their clean energy financing, which links capital recovery to tax obligations, balance sheets, have yet to boost activity. has helped facilitate securitisation of efficiency and renewables (see below) while some ESCOs are now looking to monetise energy savings Other markets in Asia have also grown. New partnerships such as the in wholesale power markets with Pay-for-Performance contracts. Asia Pacific ESCO Industry Alliance seek to promote knowledge sharing and private investment. Korea’s expanding market is supported by the The current downturn creates new economic challenges for ESCOs, government’s Energy Use Rationalization Fund, offering loans of up to especially smaller players, which may spur consolidation. Demand for USD 18 million. Korean ESCOs have also adopted new ways of renew interventions to raise buildings efficiency will likely fall due to restrictive their capital, with businesses selling accounts receivables to third measures (see Energy end use and efficiency section). Lower parties at a discount in exchange for upfront cash. In Southeast Asia, electricity and gas prices may sap incentives for contracting, while ESCO development can be inhibited by electricity subsidies and supply chains may also be disrupted. That said, buildings efficiency was regulatory barriers. Thailand’s ESCO Fund, providing equity and highlighted in the European Green Deal; as such, ESCOs may also

function as a vehicle for some recovery efforts.

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Community aggregators: A new model for funding renewables, efficiency and DERs?

Community choice aggregators (CCAs) – municipal-level entities that under current investment frameworks – while retail competition is procure bulk power, including from ESCOs, for consumers – have present in 17 US states, only 8 of them allow CCAs. emerged in some areas as an alternative to the traditional utility retail Outside of the United States, aggregators are growing in competitive model. They are most prominent in California, where regulators have markets in Europe, Australia and Japan. In Europe, their portfolios have designated them as load-serving entities responsible for meeting long- diversified beyond renewables, to include behind-the-meter storage term renewables and zero-emissions goals, and where the revenue and demand response; they often provide capacity to utilities or within share of full-service utilities has fallen to 80%, from 95% a decade ago. ancillary services markets. The rollout of smart meters and digital Stakeholders see CCAs as a new market to express local preferences management systems is critical to enabling this functionality (see for procuring renewables and demand services, with more say over Power Sector section). In addition to utility-led programmes, third party tariffs, and as a funder of investment in distributed energy resources investments are emerging, sometimes backed by public finance. The (DERs) such as solar PV, batteries and demand-side response, EIB provided a loan, with an EU guarantee, in 2020 to an aggregator to facilitating more flexible loads that can serve system integration goals. support deployment of “smart boxes” to support demand side management. However, there are challenges to realising this vision. As they are new and smaller than utilities, CCAs often lack credit ratings and a financial Electricity sales revenue in California by type of provider track record that enable financing and negotiation of contracts to support new procurement. They also still rely on utilities to manage 50 system operations and balancing, transmission of power, and often billing services. And with more customers flocking to CCAs, California 40 regulators and utilities face the growing challenge of managing tariffs 30 and charges in a way that would help fund fixed investment in the grid. Billion dollars Looking ahead, some features of CCAs, such as the ability to target 20 projects that can cater to local system needs and to form regional co-operatives, may help the integration and financing challenge. 10 Further solutions may also come from more sophisticated contractual arrangements that value storage and demand response, as well as use excess solar PV generation for managing EV charging (Trabish, 2019). 2010 2011 2012 2013 2014 2015 2016 2017 2018 But there are also larger questions over the scalability of this model Full-service providers Other providers IEA 2020. All rights reserved.

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Role of institutional investors in energy investment

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Institutional investors represent a potentially large source of finance for energy investments

With over USD 100 trillion under management, institutional investors – can more directly help finance growing investments ahead, especially including asset managers, infrastructure funds, insurance companies, in clean energy sectors. Addressing this question in quantitative ways pension funds, private equity and sovereign wealth funds – are a large remains challenging, as the relationship between capital expenditures potential source of finance for the energy sector (Arezki et al., 2016). and financial flows is not well understood (EU TEG, 2019). Moreover, understanding the impact of investors on decision-making involves Past editions of WEI have noted that 90% of energy investments are more qualitative factors, including corporate stewardship and recent financed on a primary basis from the balance sheets of companies and initiatives by some public and private actors to align financial markets consumers, with a smaller role for project finance (mostly loans from with calls to manage climate-related risks and energy transition goals. banks). But such mechanisms also depend on having a robust interconnected system of secondary financial sources and The objective here is not to provide a full accounting, but to track intermediaries, diverse investment vehicles to facilitate flows, and clear investor and capital market trends in three main channels: signals for investment, based on profit expectations and risk profiles • shareholding in the top energy companies (IEA, 2019). Although a number of well-capitalised industry players (e.g. some integrated oil and gas, utility and state-owned companies) • acquisitions and refinancing of energy projects are able to make investments from retained earnings alone, there are • financial flows to pooled vehicles (securitisation and yieldcos) for economic benefits to tapping into wider pools of finance, at a lower clean energy. cost of capital, and especially in an era of lower interest rates. Moreover, banks often face limits on their lending, particularly with The section after assesses from a broader standpoint a related trend – regulatory constraints emerging in recent years, such as Basel III. the recent dramatic rise of sustainable finance, and related regulatory developments, and how this trend also relates to energy investment. Institutional investors provide finance through three main channels:6 The events of 2020 illustrate how rapidly financial markets can shift. • companies – listed equities shareholding, bonds purchase The risk management practices of investors may adjust to liquidity • projects – equity stakes in assets, bonds purchase issues and changing risk profiles of real assets. While this analysis takes a longer view, volatility casts uncertainty over some trends. • funds or pooled investment vehicles based on energy assets. They have long played a role in fundraising by companies, but an emerging question for policy makers is the extent to which investors

6 See Nelson and Pierpont (2013) and Kaminker and Stewart (2012) for further discussion of this framework and related financing vehicles.

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Institutional investors account for a quarter of ownership in top-listed energy companies, though they play a much greater role in ownership of private companies compared with SOEs

Role of institutional investors in the ownership of the top 25 listed energy companies (ranked by market capitalisation in February 2020)

Shareholding value by type of owner Share of total ownership Saudi Aramco ~1 800 100% ExxonMobil Institutional Chevron 90% investors Shell PetroChina NextEra Energy 80% Total Corporate, Reliance 70% government BP Petrobras and other Enel 60% sources Gazprom Enbridge 50% Rosneft Sinopec Iberdrola 40% Lukoil CNOOC 30% Southern Co Dominion Energy 20% Duke Energy ConocoPhillips Equinor 10% Enterprise Products China Yangzte 50 100 150 200 250 300 Private SOEs Billion dollars companies

IEA 2020. All rights reserved. Notes: Institutional investors include asset managers, infrastructure funds, insurance companies, pension funds, private equity and sovereign wealth funds. Reflects market values as of mid-February 2020. Sources: IEA calculations based on Thomson Reuters Eikon (2020) and Bloomberg (2020).

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Before the downturn in financial markets in early 2020, investors had reduced equity positions in the top energy companies during 2018 and 2019

Change in shareholding position by institutional investors in the top 25 listed energy companies, 1Q 2018 to 4Q 2019 Average reduction = 6% Franklin Templeton Goldman Sachs Others Legal & General Deusche Bank Wellington Nuveen State Streeet Global Advisors MFS Investment Management Bank of America BlackRock Charles Schwab UBS Dimensional Fund Advisors Wells Fargo Invesco Northern Trust Global Investments Norges Bank Fidelity Geode Capital Management RBC Capital Life Insurance Corporation of India Vanguard Capital Group Morgan Stanley JP Morgan -50% -40% -30% -20% -10% 0% 10% 20% 30% IEA 2020. All rights reserved. Note: Top 25 listed companies excludes Saudi Aramco, whose initial public offering took place in 4Q 2019. Source: IEA calculations based on Thomson Reuters Eikon (2020).

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The energy investment implications of shareholding depends not just on buying and selling, but the extent to which investors become more engaged owners

Institutional investment in energy most commonly comes in the form of end of 2019, institutional investors pared shareholding in this group by traded securities on equity and debt capital markets. Among the top around 6%. Share buybacks by some companies (e.g. oil and gas 25 listed energy companies, by capital expenditure, investors majors) during the past two years likely had influence on this, and accounted for nearly USD 1 trillion, or 25%, of the market value of these there is considerable divergence in holdings among companies, partly firms, as of early 2020. Excluding Saudi Aramco, whose initial public reflecting investor uncertainty over how well some large players in the offering took place in late 2019, the capital markets represented nearly energy industry can position themselves in a changing market 40% of ownership. Institutional shareholding of listed equities varies by environment. The pullback included investors with sizeable passive type of company, and investment opportunities tend to be more holdings – as indices rebalanced, due to changing market prices and prominent with firms without recourse to government funding. For the weightings, so did passive investor positions. private-sector energy companies, investors account for over half of The energy investment implications of investor shareholding has both shareholding, while for SOEs the share is less than 10%. financial and corporate governance components. The buying and Over 80% of institutional capital for these companies comes from asset selling of shares is integral to corporate fundraising activities and the managers and brokerages, the largest holders of which include cost of capital, which can influence the selection of projects based on BlackRock, Vanguard, the Capital Group and State Street Global evolving risk and return requirements of investors, who have fiduciary Advisors. While difficult to quantify, the investment strategies of the duty to prudently manage the financial assets of their beneficiaries. largest asset managers include a sizeable component of passive funds A larger question is the extent to which normally passive investors may that follow established broad indices, compared with funds based on become more active, seeking to wield more influence over energy active strategies, where asset managers more frequently buy and sell companies in terms of strategy and decisions over capital expenditures shares. Pension funds and insurance companies, which typically and dividends. Stock ownership allows investors to vote on company employ active strategies, but with long time horizons, accounted for issues and the selection of the board of directors at annual less than 10%, followed by sovereign wealth funds. shareholders meetings. Already, some investors are taking stronger The first quarter of 2020 was marked by extraordinary movements in action to engage energy companies on sustainability issues (see below) financial markets, with the market value of oil and gas companies, in and one indicator of change is the near-doubling of stewardship teams particular, falling precipitously on the back of economic risks from the of major asset managers between 2017 and early 2020 (Mooney, 2020). coronavirus, and prospects of a near-term oil supply glut. Even before Further monitoring is needed to assess investor commitments and these events, however, there was some evidence of investors pulling industry impacts in this area, particularly amid the current economic

back from the largest energy companies. From the start of 2018 to the downturn.

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Institutional investors now fund nearly a quarter of a growing market for energy project acquisitions and refinancings, with activity concentrated mostly in mature economies

The role of institutional investors in energy project acquisitions and refinancing

Acquisitions & refinancing of energy assets Institutional capital by transaction region (2015-19) 200 Other regions, 3%

160 Australia/NZ, 4% USD billion

Latin America, 5% North 120 America, 45% India, 4% 80 Southeast Asia, 6% 40

Europe, 36% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Institutional investors Other sources of finance (industry, banks, governments)

IEA 2020 All rights reserved. Notes: Includes disclosed transactions. Debt includes loans and the purchase of commercial bonds. Institutional investors include asset managers, infrastructure funds, insurance companies, pension funds, private equity, other private investors and sovereign wealth funds. NZ = New Zealand. Source: IEA calculations based on IJGlobal (2020).

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Most institutional investment for energy projects has gone towards acquiring and refinancing assets with perceived reliable cash flows, particularly renewables and energy infrastructure

Institutional investor finance for energy project acquisitions and refinancing, by sector

40 Other

Mixed power

USD billion Electricity networks

30 Thermal power

Renewables

Mixed oil & gas

20 Midstream oil & gas

Upstream oil & gas

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: Includes disclosed transactions. Institutional investors include asset managers, infrastructure funds, insurance companies, pension funds, private equity, other private investors and sovereign wealth funds. Source: IEA calculations based on IJGlobal (2020).

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After record project refinancing and acquisitions the past three years, will activity slow in 2020?

At more than USD 140 billion in 2019, the market for acquisitions and There has been a shift by investors from the refinancing of upstream oil refinancing of energy assets (primarily large-scale energy supply and and gas in the first half of the decade towards renewables, which offer infrastructure projects) has more than doubled over the past decade, relatively predictable cash flows from long-term contracts. The investor fuelled by ongoing industry restructuring in the oil and gas and power portion of renewables transactions was around USD 12 billion in 2019 sectors and facilitated by accommodative financial conditions. While (from a record USD 17 billion in 2018), led by offshore wind. Interest in refinancing of existing assets does not directly add new projects to the oil and gas infrastructure (pipelines and LNG) projects has also grown, mix, it plays an important role in energy investment by creating supported by master limited partnership structures in the United States opportunities for developers to recycle their capital, reduce financing offering tax pass-through benefits, and in power and heating networks costs and improve confidence to undertake new projects (see below). with remuneration typically based on regulated rates of return. Institutional investors have played a growing role in this market, In 2019, the largest deals with investor participation included accounting for over USD 30 billion, nearly a quarter of transactions, up refinancing of the 588 MW Beatrice Offshore Wind Farm (United from less than one-fifth in 2010, driven by an ongoing search for yield in Kingdom); acquisition of the Veja Mate Offshore Wind Farm (Germany); a low interest rate environment, and growing interest in ways to directly refinancing of the Sabine Pass LNG and Creole Trail pipeline (United invest in low-carbon energy projects to meet sustainability goals (see States); and acquisition of Energias de Portugal’s (EDP’s) hydropower below). Finance has come through both debt and equity channels, portfolio (Portugal). Early indications from 2020 suggest that investors though in the past five years, their provision of project debt and with cash to deploy are becoming more disciplined and awaiting clarity purchase of project bonds has risen, in part due to the shifting nature of on price discovery in financial markets. That said, financing existing transactions to power- and infrastructure-related assets. assets with reliable cash flows, such as renewables, may remain During the past five years, over 80% of acquisitions and refinancings by attractive in the face of market volatility. institutional investors have come in geographies with relatively liquid Looking ahead, there is considerable scope for more investor and deep capital markets (i.e. North America and European countries), participation, particularly in renewables, where their refinancing activity with the United States alone accounting for one-third. Financing activity is equivalent to about 5% of annual capital expenditures. Scaling up has remained more limited in emerging economies, where investment project-based institutional finance depends on policies that support risks are higher and capital markets are less developed, though cash flow profiles aligned with investor risk-return profiles and reduced transactions in India and in Brazil, where the government has promoted barriers to participation as well as investor efforts to build in-house skills tax-exempt local infrastructure bonds, picked up the past three years; and manage scale and liquidity issues associated with direct in China there is a lack of disclosed transactions, which makes investments. This is an area ripe for further work. assessing the true level of activity more challenging.

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Can refinancing and acquisitions facilitate exit opportunities and economics for renewables?

While investor capital for refinancing and acquisitions does not directly interest rate environment when return expectations shift for investors support new project development, it can have a powerful indirect between the period of project development and sale. effect. Investors provide an exit opportunity for developers, allowing them to swiftly recover their capital and reinvest this in new projects. Enhancing equity returns (onshore wind example) 20% There are also economic benefits. Some renewables developers have been able to enhance their equity returns through a combination of improving project output, reducing capital costs and employing greater leverage from banks. Moreover, selling operating projects – which can 16% match the lower risk and return requirements of investors – provides an underutilised means to enhancing returns. For an indicative onshore wind project in Europe, selling a 50% stake of the investment to an 12% institutional investor with a return expectation of 5% can help boost equity returns for the developer from single- to double-digit rates. 8% These economic benefits can also support more affordable deployment of renewables. Substitution of institutional capital for a part of the original equity reduces the lifetime cost of capital for projects and can 4% enable developers to bid for power purchase contracts at lower electricity prices, while maintaining the same level of expected returns. For example, analysis by the Development Bank of Japan suggests that a 2-3 percentage point reduction in the weighted average cost of Base IRR Add Reduce Improve Increase Sell 50% capital (from refinancing and acquisitions by institutional investors) leverage capital output electricity stake in could translate into a nearly 15% reduction (from JPY 36/kWh) of feed-in costs by by 5% price by 5% 3rd year of 10% operation tariff levels for offshore wind in Japan (Yasuda, 2019). Creating such opportunities requires confidence over potential exit IEA 2020. All rights reserved. opportunities when developers evaluate the financial case for investing Notes: IRR = internal rate of return; analysis is based on an indicative in a new project. Greater participation of investors in renewables onshore wind farm in Europe with capital cost of USD 1 800/kW, capacity investment could be a factor in reinforcing these expectations. That factor of 22%, added leverage of 60%, and 50% equity stake acquired by said, this model can also entail risks for developers in a changing an institutional investor with return expectations of 5%.

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Among pooled investment vehicles, securitisation of energy-related assets has picked up, led by green mortgages, while growth in yieldcos has been more lacklustre

Issuance of pooled investment vehicles based on clean energy assets: securitisation (left) and yield companies (right)

Energy-related ABS/MBS issuance Renewables yieldcos net issuance

30 6

25 4 USD billion 20 2

15 0

10 -2

5 -4

-6 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Distributed solar PV PACE loans Green mortgages Other energy Equity Debt IEA 2020. All rights reserved. Notes: ABS = asset-backed securities; MBS = mortgage-backed securities; PACE = property-assessed clean energy. “Other energy” includes issuance based on electricity networks, utility-scale renewables and thermal power. Source: IEA calculations based on Thomson Reuters Eikon (2020).

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Policies that help manage cash flow risks for efficiency and renewables help assets connect to low-cost institutional capital, though issuance remains small relative to the wider market

Institutional investors can direct capital towards a universe of project Securitisations of clean energy depend on underlying cash flows of funds and pooled vehicles (i.e. those that aggregate a portfolio of many small assets; policies often help to manage credit risks and assets) based on energy investments, but it can be challenging to enhance technical and legal standardisation. Fannie Mae provides assess their links to real assets. One mapping in Europe tallied over guarantees for its mortgages, and US-based solar PV securities are EUR 20 billion in green funds, but their energy composition is not largely based on revenues under net metering schemes. PACE entirely clear (Novethic, 2017). Some dedicated funds have emerged programmes (available in 20 US states) provide a standard framework around clean energy (e.g. storage and efficiency funds launched in and link loan repayments to tax obligations, encouraging lenders to 2019 by SUSI Partners), but a number remain unlisted. provide loans on better terms; there is now a movement to develop PACE in Europe. Some state-backed Green Banks are now facilitating Securitisation and yieldcos aggregate portfolios of loans, receivables or securitisation in their local markets (Green Bank Network, 2019). projects from the balance sheets of banks and developers. These portfolios are then issued as listed securities. They are well suited to There is some evidence such assets can have credit risk advantages directly refinancing small-scale assets (e.g. efficiency, distributed solar (see below). The ability to refinance through securitisation can also PV), whose transaction sizes would not attract investor capital, and can encourage banks to develop clean energy financing products – also work for larger projects. By pooling assets, these vehicles diversify e.g. Barclays in 2018 launched a green mortgage product which offers a and spread risks across investors, enabling a lower cost of capital. 10 basis point discount to traditional loans. So far, securitisation has been used on just a few large-scale projects (e.g. gas power, networks), Securitisation of energy into listed debt securities has accelerated in but Singapore recently launched a USD 2 billion platform to encourage recent years, though dipped in 2019 to under USD 28 billion. Over the infrastructure refinancing via this mechanism. past three years, three-quarters has come from issuance of green MBS (loans to properties making demonstrated efficiency or renewables Yieldcos – listed equity vehicles holding multiple operational renewable investments) by Fannie Mae (US agency which purchases loans from energy projects (which can also be suitable for efficiency), typically other lenders), though increased competition in the mortgage market benefiting from power purchase contracts – saw a boost in fundraising has slowed its activity. ABS based on leases and loans for distributed over 2014-15. But experiences have considerably varied by market, with solar PV and efficiency/renewables investments made under PACE differences in how assets are aggregated and capital is structured payment mechanisms (i.e. tax liens) were over USD 3 billion in 2019. impacting financial performance (Donovan and Li, 2018). These Most securitisation is in the United States, but energy assets account structures also may not offer suitable diversification, with the parent for only 1% of the USD 2.5 trillion of ABS/MBS issued there in 2019. operator common to all assets. This has called into question some of

their cost of capital benefits, so far, relative to traditional utility finance.

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Lower credit risk from asset-backed securities based on clean energy and efficiency?

An important question for investors and policy makers looking at developing a pilot scheme that has demonstrated lower default risks securitisation pertains to whether clean energy assets can manage cash from mortgages based on energy-efficient homes in the Netherlands. flow risks better than other options, enabling lower cost of capital. Still, it is not clear that green debt always outperforms conventional Some evidence comes from the ratings of ABS based on PACE bonds (see below) and regulators lack an empirical track record. financing. Residential properties with a PACE assessment had lower tax Further analysis is needed, including data collection at asset level and delinquency rates than benchmarks, and loan prepayment rates had translation of performance metrics into credit model parameters. come in higher than original assumptions, which were credit-positive UK mortgage default rates based on energy efficiency level factors for a new asset class (Nocera et al., 2018). Part of this performance may stem from the type of homeowner who invests in 1.2% efficiency and renewables upgrades, but it likely also reflects the payment security provided by the PACE mechanism itself. It is further possible that energy savings from efficiency projects can 0.9% enhance property values and translate into lower credit risk for mortgages. A recent Bank of England study of UK residential mortgages found that those properties with high degrees of energy efficiency (as 0.6% classified by energy performance certificates [EPC]) had somewhat lower default rates than low-energy-efficient properties, even when controlling for household income levels and other factors. 0.3% These pieces of evidence suggest there may be financial performance benefits for clean energy and efficiency, also reinforced by socio-economic factors and policies. This has implications for financial regulator discussions in Europe on the capital treatment of assets based on environmental attributes, which can further impact energy High Medium Low project economics. In 2020 the Central Bank of Hungary instituted a (EPC = A,B,C) (EPC = D) (EPC = E,F,G) preferential capital requirement programme for banks if they apply an With controls (income, property/loan, EPC inspection) interest rate reduction of 0.3% on mortgages to improve the energy Base comparison (without controls) efficiency of the underlying property or refurbishment loans (mortgage IEA 2020. All rights reserved. rates were 4-5% in 2019). The EU Energy Efficient Mortgages Initiative is Source: Adapted from Guin and Korhonen (2020).

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Can securitisation also help to ease financial burdens from unprofitable assets?

As the roles of renewables and efficiency rise in the energy system, in the global energy system and decisions for gas networks consider some regulators are looking at financing strategies for managing their potential to deliver different types of gas in a low-emissions future, turnover of the existing capital stock, particularly regulated coal and securitisation may be also looked upon in some markets – among other gas assets with changing utilisation that makes them less economic.7 In options – for helping to manage energy infrastructure. addition to traditional utility finance tools – e.g. accelerated depreciation and adjustments to equity returns – the practice of Securitised bonds issued by US utilities by use of proceeds securitisation features as a way to refinance obligations and take advantage of the lower cost of capital for debt compared with the 40 equity that makes up part of the utility cost of finance.

Since the mid-1990s, US utilities have securitised over USD 50 billion of 30 assets, mostly before 2005 in the wake of state-level deregulations, USD billion with 80% of the use of proceeds going to diverse stranded costs and storm damages. In 2016, securitisation funded retirement of a nuclear 20 plant, though little activity has followed. To obtain a high credit rating, such securities need to be backed by 10 regulatory guarantees. While this places a burden on ratepayers, it can be more affordable than other financial options for early retirement. Refinancing with debt can also mean a haircut for equity investors and 1997-2004 2005-12 2013-19 may be less attractive for the utility (e.g. versus depreciation). In this Stranded costs Storm recovery light, some utilities are looking at securitising and then reinvesting the Nuclear plant retirement Other proceeds from unprofitable coal power generation into renewable IEA 2020. All rights reserved. power (“steel-for-fuel”), to create a new equity return and support transition goals (Lehr and O’Boyle, 2018). Source: IEA calculations based on Saber Partners (2019). Overall, the question of “who pays” for assets with changing utilisation profiles is not easy and securitisation may require special regulatory conditions put in place to make it possible. As electrification increases

7 See IEA (2019b) for technology option analysis for coal power, gas grids.

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Sustainable finance and energy investment

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There is growing interest by capital markets in sustainability, marked by three broad trends: first, investor pressure is focusing corporate attention on climate-related risks

Investor engagement with oil and gas companies on climate-related issues

Number of climate-related shareholder Share of resolutions by type resolutions for oil and gas companies 250 100% Report on sustainability and emissions targets 200 80% Report on financial risks and transition plans 150 60%

Report on political advocacy 100 40%

Change board governance 50 20% and executive pay

Adopt emissions reduction targets 2010-14 2015-19

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Second, there is a growing need to identify and evaluate financial risks posed by the energy transition, though the quality and comparability of disclosed data remain incomplete

Number of companies in the S&P 500 reporting energy- and emissions-related metrics

Emissions-related metrics Energy-related metrics 500

400

300 Number ofcompanies Number

200

100

0 CO CO emissions Scope 1 Scope 2 Scope 3 Efficiency Efficiency Total emissions target policy emissions emissions emissions policy target energy use ₂ ₂ IEA 2020. All rights reserved. Notes: S&P 500 is a stock market index of 500 large companies listed in the United States. Scope 1 greenhouse gas emissions come directly from company operations; scope 2 emissions arise from the generation of energy that is purchased by companies; scope 3 emissions occur during the use of a company’s products and are more challenging to estimate. Source: IEA calculations based on Thomson Reuters Eikon (2020).

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Third, there are new efforts to better classify sustainable investments and avoid greenwashing, but market approaches differ and applying taxonomies may require new data and interpretation

Select sustainable finance taxonomy and certification initiatives Indicative eligibility of capital expenditures under the proposed EU Sustainable Finance Taxonomy for the top 5 European utilities

Reporting Initiative Effective compliance 60%

Under Canada Green Taxonomy Voluntary 50% development

China Green Industry Guidance Voluntary 2020 40% Catalogue

EU Taxonomy of Sustainable 30% Mandatory 2021 Economic Activities 20% Under Malaysia Green Taxonomy Voluntary development 10% MDB Common Principles for Mandatory 2012 Climate Mitigation Finance Tracking Not eligible Potentially eligible Likely eligible ISO Technical Committee 322 on Under Voluntary (requires further Sustainable Finance development reporting)

IEA 2020. All rights reserved. Note: MDB = multilateral development banks; ISO = International Organization for Standardization; the chart on the right depicts the top 5 European utilities by 2019 capital expenditures, with capital expenditure eligibility estimated based on review of corporate financial reporting.

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Broad push for sustainable finance, but will recent financial market volatility affect momentum?

In recent years, there has been a broad push by investors and policy emissions data. Sustainability disclosure and accounting standards makers across three areas to align decision-making in the financial remain fragmented, with several frameworks in existence (Gibbs, sector with improving sustainability in the real economy. This creates Portilla and Rismanchi, 2020). There is also lack of agreed benchmarks opportunities and challenges for the allocation of capital in the energy (e.g. scenarios) to assess reporting consistency with climate objectives sector, as well as the engagement of investors with energy companies. over different time horizons. First, investor pressure is focusing corporate attention on climate- A number of initiatives to classify sustainable investments have related risks through engagement and divestment movements. Over emerged, as a way of clarifying financial decision-making. The most the past decade, climate-related shareholder resolutions, which comprehensive framework has come from Europe, where the proposed commonly seek to improve disclosure or align the strategies of EU Taxonomy is set to require investors to report from 2021 portfolio companies with a more sustainable pathway, have strongly increased, alignment based on sustainability criteria for 70 different economic especially for oil and gas companies. Meanwhile, burgeoning investor activities. Applying the taxonomy will require better financial data and collaborations, such as the Climate Action 100+, increasingly seek to analyst interpretation – an indicative look at Europe’s top utilities facilitate corporate engagement on sustainability. Earlier this year, the suggests that current company reporting does not yet provide the world’s largest asset manager, BlackRock, announced new disclosure granularity needed to always map criteria onto key financial metrics requirements, climate-related engagement and criteria for its such as capital expenditures and sales. A new EU Climate Benchmark investments. More banks, pension funds, insurance companies and regulation seeks to provide transparent measures for investors to investors are limiting exposure to certain types of fossil fuel projects; compare the financial performance of their own strategies. the primary focus has been on coal, but restrictions are increasingly There are also challenges in agreeing what is meant by “sustainable” in seen on some oil and gas projects. different markets around the world. Other taxonomies are emerging in Second, there is a growing need for financial institutions to identify and Canada, China and Malaysia, which seek to base criteria on local evaluate the financial risks associated with energy transition. Doing so conditions and varied pathways for energy transition. requires better corporate disclosure on energy and environmental How might recent market volatility affect momentum? The financial performance, as well as assessment tools. Some jurisdictions crisis of a decade ago may have helped to refocus investor attention on (e.g. France) have already mandated investors to report the sustainability (IFC, 2009). The European Union continues to push sustainability of their portfolios, while recommendations of the Task forward on consultations related to its Action Plan on Sustainable Force on Climate-Related Financial Disclosures and those by central Finance. While sustainable finance flows (see below) have slowed, as banks (e.g. from the Network on Greening the Financial System) have investors reassess exposure across all asset classes, such instruments encouraged voluntary reporting and risk analysis. But metrics are may also play a role in the financial and fiscal policy responses. incomplete – for example, less than 60% of S&P 500 firms report any

Page | 176 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Higher and more diverse sustainable debt flows, with most intended uses towards clean energy

Sustainable debt issuance (left) and intended use of proceeds from bonds issued in 2018-19 (right)

Sustainable debt issuance Intended use of proceeds (2018-19 issuance) 500

400

USD billion Renewable Other uses energy and non- 19% 300 specified 31%

200 Mixed energy and Energy emissions efficiency and 100 10% end use 40%

2014 2015 2016 2017 2018 2019 1Q 2020 Green bond Green loan Sustainability-linked debt Sustainability bond

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Do green bonds offer additional financial benefits to energy project developers and investors?

Green bond issuer costs compared with conventional bonds (left) and annual returns (right)

Spread at issuance relative to comparative issuer bond Cumulative return (Jan 2017 = 100) 150 125

100 120 Basis points 50 115

0 110

-50 105

-100 100

-150 95 Jan 13 Jun 14 Oct 15 Mar 17 Jul 18 Dec 19 Jan 17 Oct 17 Jul 18 Apr 19 Jan 20 Government Corporate DFIs and other supranational Global investment-grade bonds Global green bonds

Page | 178 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Sustainable finance flows have grown rapidly, but at a rate far outpacing clean energy capex

Among listed investments, sustainable debt securities – including sheets. So far, the Philippines and India have led activity, with green labelled green bonds, green and sustainable loans, and sustainability- bonds issued by large conglomerates, mostly to finance renewables. linked debt – may provide investors the clearest route to capital Since 2014, overall sustainable debt issuance has grown over tenfold. 8 allocation for clean energy and other green activities. They may also This pace has far exceeded that for new capital expenditures in be particularly suited for small-scale renewables and efficiency renewables and efficiency, which have remained relatively stable over investments, which are difficult for investors to fund directly. These the period(see Power sector and Energy end use and efficiency advantages stem from labelling and certification (under frameworks sections). These securities have so far had more of an impact on such as Green Bond Principles, and more specific evaluations, improving funding for existing programmes, refinancing assets and e.g. Climate Bonds Standard). Still, frameworks are not always facilitating sustainability dialogue between investors and companies. harmonised across markets, and as labelled securities grow beyond Some mismatch may stem from availability of opportunities that meet green bonds, their impact and uses become more complex to evaluate. liquidity and asset allocation requirements for investors, but it may also In 2019, sustainable debt issuance was nearly USD 450 billion, up from represent the different speeds at which sustainability efforts are near USD 250 billion, though it remains a fraction of overall debt proceeding in the financial markets compared with policies and issuance at just over 5%. So far in 2020, issuance has proceeded at a decision-making for new capital formation for real energy assets. slower pace, on an annualised basis, reflecting wider market volatility. There is also debate over the financial benefits – i.e. do sustainable Green bonds, whose labelling corresponds to projects and activities instruments lower the cost of capital or enhance returns, improving defined in the bond, represented 60% of 2019 issuance, led by the affordability of clean energy investments? So far, credit risk government actors (US agency Fannie Mae, German development bank profiles and issuance costs are broadly comparable to that of KfW, and Dutch and French governments). Financial institutions, which conventional instruments, though there are periods of mostly use proceeds for on-lending, were the largest issuers, but outperformance. In the first quarter of 2020, returns for green bonds corporations (especially power) grew fastest. Sustainability-linked debt, were in line with that for global investment-grade bonds. New types of based on performance rather than activities, rose to 30% of issuance. instruments are now seeking to better tie financial performance to With over 80% of issuance from the United States, Europe, China and environmental outcomes– e.g. interest rates for a USD 2.5 billion Enel mature markets, there is scope for green bonds to play a greater role in bond issued in 2019 are tied to goals for renewables capacity and financing companies and projects in emerging economies, where there emissions levels. are higher credit constraints and investments rely more on balance

8 Sustainable debt straddles three investment channels (corporate, project, pooled vehicles), providing an information signal in established routes of financing.

Page | 179 IEA. All reserved. rights World Energy Investment 2020 Energy financing and funding

Transition bonds: Funding energy transition for legacy actors, or incremental improvements?

Labelling and standards for green bonds give investors confidence that goals and a need to scale up investment for a range of technologies, by a proceeds will be used for sustainable aims. Still, this can exclude actors large range of actors, transition bonds are likely to remain a part of with businesses based on fossil fuel supply or consumption as well as financing and policy discussions, though likely with increased focus on environmental activities that fall under so-called “shades of green”.9 guidelines to improve standards and transparency. Such areas still play an important role in achieving climate aims. For Examples of energy-related transition bonds/loans example, meeting climate change goals requires significant reductions in Amount (USD methane emissions for upstream oil and gas. Issuer Intended use billion) Transition bonds are being marketed to help issuers, such as oil and gas Castle Peak Company New combined-cycle gas turbine power companies or energy-intensive industries, fund improvements in 0.5 (2017) plant in China sustainability, despite the relatively high carbon footprint of these actors. The market remains small for now, but as investors and banks reassess Retrofit gas distribution network to climate-related risks, such instruments may help to fill potential financing Cadent (2020) 0.535 reduce methane leakages and trial gaps for the project developers and provide more nuanced approaches hydrogen distribution to capital allocation by the financial community. For example, oil and gas Financing coal-to-gas switching in major Shell recently signed a USD 10 billion credit facility where interest Crédit Agricole (2019) 0.11 power and oil-to-gas switching in payments are linked to progress in emissions reductions. In shipping, a maritime shipping difficult-to-decarbonise sector, Teekay Shuttle Tankers is seeking to raise GreenTransition Portfolio: e.g. funds for emissions reductions through new vessels that can use LNG European Bank for efficiency in cement, chemicals, steel and propane mixes as fuel (Fjell, 2019). Reconstruction and 0.55 manufacturing; electricity grids; Development (2019) At the same time, transition bonds may not provide the transparency, buildings renovation benchmarking or level of improvement that some investors with strict Shell (2019) 10 Emissions reductions sustainability criteria apply to capital allocation. And they may not fit within tightening criteria for green bonds, such as under the proposed Biomethane, energy efficiency, methane Snam (2019) 0.5 EU Taxonomy. Some stakeholders have suggested that transition bonds emissions reduction may increase the risk of corporate greenwashing by focusing on incremental improvements rather than long-term climate solutions. In sum, given the complexity of solutions to reach sustainable development

9 See CICERO (2015) for a bond framework based on shades of green.

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R&D and technology innovation

Page | 181 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

Investment in energy R&D

Page | 182 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

Government energy R&D spending grew by 3% in 2019, with robust expansion in Europe and the United States alongside steady spending in China as the 13th Five-Year Plan nears its end

Spending on energy R&D by national governments 35 Rest of world

30 Japan, Korea, Australia, New Zealand Europe 25 USD billion USD (2019) North America 20 China

2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: R&D = research and development, and includes spending on demonstration projects (i.e. RD&D) wherever reported by governments as defined in IEA (2011). 2019 is a preliminary estimate based on data available by late April 2020. The IEA Secretariat has estimated US data from public sources. Countries not part of the IEA RD&D statistical sharing exercise in 2019 and 2020 have been estimated from public sources and exchanges with government officials.

Source: IEA (2020h).

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At 80%, more public energy R&D went to low-carbon technologies in 2019 than the prior year, but the near-term outlook depends on the inclusion of clean energy R&D in recovery measures

Government energy R&D spending in 2019 grew by 3% to In 2019, around 80% of all public energy R&D spending was on low- USD 30 billion in 2019, and was mostly directed to low-carbon energy carbon technologies – energy efficiency, CCUS, renewables, nuclear, technologies. While the growth rate in 2019 was below that of the hydrogen, energy storage and cross-cutting issues such as smart grids. previous two years, it remained above the annual average since 2014. It With 6% growth, spending on low-carbon technologies rose faster than also reflects the multi-annual nature of many government R&D budgets, total public energy R&D spending, reaching USD 25 billion in 2019. In which follow cyclical trends within budget periods. For example, a main China, the low-carbon component of energy R&D grew by 10% in 2019, reason for the weaker growth in 2019 was the stabilisation of China’s with big increases in R&D for energy efficiency and hydrogen in public energy R&D spending, yet this is closely tied to the Five-Year Plan particular, driving up the global total. However, to some extent this (FYP) framework in China. Certain research programmes, especially year-on-year growth in 2019 reflects a slower start to 13th FYP spending those related to coal technologies, have passed their peak spending compared with fossil fuel technologies, not an unfolding trend. Major under the 13th FYP and are now analysing results and planning for the governments are increasing energy research investments, as they next funding period, from 2021 to 2025. There are indications that low- pledged to do in 2015 under the Mission Innovation initiative. carbon technologies, including hydrogen, could receive a boost in the While it is too early to determine the impact of the Covid-19 pandemic next period. on public energy R&D, the risks are clear. R&D practitioners may find it Growth was robust in Europe and the United States; spending on public difficult to execute funded projects in 2020, and public budgets will be energy R&D rose by 7% in both economies, above the recent annual under pressure. Experience from the 2008 financial crisis indicates that trend. Looking ahead, increasing energy R&D has been a central feature budgets are likely to be fixed in 2020, most likely seeing reductions in of policy discussions in the European Union as part of the European 2022-23. In wealthier countries, cuts may be modest or nonexistent as Green Deal and the expanded R&D programme Horizon Europe. In the governments pursue countercyclical R&D policy through stimulus United States, Congress will decide the level of funding for 2021 by measures. In 2009-11, the American Recovery and Reinvestment Act October and this will be influenced by considerations relating to raised annual energy R&D spending by 75% compared with 2006-08, economic heath and economic stimulus. Several proposals to increase before it fell back in 2012-14. If global public R&D were raised by 75% in energy R&D are currently circulating in Washington, including a coming years, it would add USD 18 billion of funding. In emerging bipartisan American Energy Innovation Act with provisions to establish markets, on the other hand, R&D budgets and value chains are less new R&D programmes. At 0.06%, Japan has one of the highest ratios of resilient and the public sector is more dominant. This poses a risk to the public energy R&D spending to GDP, alongside China, and spending development of appropriate clean energy technologies for countries there was constant with respect to GDP in 2019. expected to grow their energy sectors most in coming decades.

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Corporate energy R&D spending grew 3% in 2019, with little growth in the leading sectors of oil and gas and automotive, both of which could restrain R&D as revenue drops in 2020-21

Global reported corporate energy R&D spending (left) and growth rates for revenue and R&D for selected sectors, 2007-12 (right) 100 60% Revenue R&D 40% 75

20%

USD billion USD (2019) 50 0%

25 -20% '07-08 '09-10 '11-12 '07-08 '09-10 '11-12 '09-10 '11-12 '07-08 '09-10 '11-12 '07-08 Automotive Oil and gas Combustion Electricity and 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 equipment renewables

Automotive Oil and gas Electricity generation and networks Renewables Nuclear Thermal power and combustion equipment Other IEA 2020. All rights reserved. Notes: “Other” comprises CCUS, electricity storage, insulation, lighting, other fossil fuels and smart energy systems. Corporate energy R&D spending includes reported R&D expenditure by companies in sectors that are dependent on energy technologies, including energy efficiency technologies where possible. Classifications are based on the Bloomberg Industry Classification System. “Automotive” includes technologies for fuel economy, alternative fuels and alternative drivetrains. To allocate R&D spending for companies active in multiple sectors, shares of revenue per sector are used in the absence of other information. All publicly reported R&D spending is included, though companies domiciled in countries that do not require disclosure of R&D spending are under-represented. Depending on the jurisdiction and company, publicly reported corporate R&D spending can include a range of capitalised and non-capitalised costs, from basic research to product development and, in some cases, resource exploration. Compared with World Energy Investment 2019, a small number of companies in countries with highly volatile inflation and exchange rates, including Venezuela’s PDVSA, have been removed from the dataset to avoid atypical annual changes at the global level. Right-hand chart shows average annual growth rates per pairs of years for the top 20 R&D spenders per sector that reported data in each year. Source: IEA based on Bloomberg (2020).

Page | 185 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

The push for electro-mobility and cleaner cars has boosted overall corporate energy R&D since 2010, while renewables grew the fastest, at 74%, and oil and gas grew the least, at 9%

Companies active in energy technology sectors over the last decade Despite securing a higher share of sales from more profitable cars such have increased their total annual energy R&D spending by around 40% as SUVs, the lower margins on EVs – an area of expected strong future since 2010, based on our analysis of the latest available data from growth – means that investments in new production lines are expected annual reports. The total energy R&D spending of this sample reached to stretch balance sheets. Energy-related automotive R&D is estimated around USD 90 billion in 2019, 3% higher than in 2018. The multi-year to have stabilised between 2018 and 2019 after several years of growth, trend traces two periods averaging growth of over 5% (2010-13 and and this sector is a key factor in the overall stagnation. This reflects 2015-18), preceded by the global financial crisis and divided by the wider cuts to R&D in the automotive supply chain in 2019 that offset economic impact of the oil price collapse of 2014, which caused a 10% growth from the major carmakers. VW Group, for example, increased drop in the R&D spending of oil and gas companies over two years. In overall R&D to USD 16 billion, or 7% of revenue. Anticipated cuts to R&D each case, the periods of higher growth could therefore have been spending in 2020-21 could be a setback to fuel economy improvements responses to disruptions. While it is hard to draw conclusions from a that are needed to accompany the shift to larger vehicles (see Energy single year, the apparent slowdown in 2019 could have reflected a End Use and Efficiency section) and electrification. return to the longer-term trend. That issue will not be answered in The financial crisis of 2008 and the oil price collapse of 2014 provide 2020, however, as the impacts of the Covid-19 pandemic will almost some insight into the likely response of companies to the impacts of the certainly lead to a reduction in corporate energy R&D in 2020-21. Covid-19 pandemic. In 2009-10 the total R&D spending of major sectors Across the period, companies active in renewable energy technologies held up well relative to revenues, with the exception of the automotive represent a particularly bright and resilient story. These companies sector. However, the electricity supply and renewables sectors were spent 74% more on R&D between 2010 and 2019, adding over the only ones not to experience slower growth or cuts to R&D budgets USD 2.5 billion to efforts to improve their technologies, complementing in this period. After 2014, oil and gas company R&D took four years to over USD 4 billion spent on renewables R&D by governments. return to growth and remains below the 2013 level. Automakers – who typically have much higher R&D budgets than While R&D spending is likely to suffer, it can be expected to be much energy companies in absolute terms and as a share of revenue – less affected than capital expenditures, as companies seek to retain continue to increase their spending as government policies and R&D staff and capabilities, and complete ongoing projects. As in 2009, competitive pressures drive increased focus on energy efficiency and the outcome will be policy-dependent, with tax incentives and R&D- electric vehicles. However, the data suggest they may be facing a specific loans being proposed for inclusion in stimulus packages. Still, balancing act between a weaker outlook for car sales revenue and the for the large-scale demonstration of technologies, such as CCUS, cuts

need to invest in new vehicles and manufacturing supply chains. to investment could be more damaging than those to R&D.

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Trends in investment for technology innovation

Page | 187 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

Venture capital investment remained robust in 2019, with more diversification of sectors and countries for energy technology start-ups. Storage and hydrogen saw the most growth.

Global early-stage venture capital investment in energy technology companies

6 600 Conventional fuels Other low-carbon energy 5 500 Energy storage, hydrogen, fuel cells Energy efficiency

USD billion USD (2019) 4 400 Other renewables Bioenergy Solar 3 300 Low-carbon transport Number of deals (right) 2 200

1 100

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 IEA 2020. All rights reserved. Notes: Includes seed, series A and series B financing deals. Outlier deals of over USD 1 billion that distort the year-on-year trend are excluded; they totalled USD 2.1 billion in 2018 and zero in 2019. World Energy Investment 2019 did not exclude them. Transport includes alternative powertrains and their infrastructure but does not include shared mobility, logistics or autonomous vehicle technology. “Bioenergy” does not include biochemicals. “Other low- carbon energy” includes CCUS, smart grids. “Conventional fuels” includes fossil fuel extraction and use as well as vehicle fuel economy. Sources: IEA calculations based on Cleantech Group (2020).

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While policies in major economies supported VC investment in 2019, private-led scale-up of innovative energy technologies could face major headwinds over the next two years

Total equity investment in energy technology start-ups, including Start-ups receiving funding also diversified geographically. At 19%, growth equity, by all investor types, stood at USD 16.5 billion in 2019. Of Europe had its highest share of reported deal value in four years, while this, early-stage venture capital (VC) (seed, series A and series B), which China, at 22%, had its lowest share since 2016. The US share declined to supports innovative firms through their highest risk stages, is estimated 41% in 2019 compared with 45% in 2018. By contrast, India increased its to have been USD 4 billion. These sums are lower than those spent on share to 12% in 2019, from an average of 3% over the previous decade. energy R&D by governments and companies, but this private risk Notable Indian energy start-ups completing funding rounds included capital plays an important role by enabling market creation and scale- Ola Electric Mobility (USD 250 million), Hero Future Energies up of the most market-ready technologies. The total reported deal value (USD 150 million) and Ecozen Solutions (USD 6 million). in 2019 was 7% below that of 2018, but the last two years are well above The average disclosed deal value for energy tech start-ups was 10% the decadal average. lower in 2019 than 2018, but at USD 12 million, it remains higher than at Other indicators also show the market is maturing. Compared with any point over the previous decade. Deal size is particularly high in recent years, 2019 early-stage VC was spread across more technology China, with start-ups there sometimes raising hundreds of millions of areas. While low-carbon transport (mostly EVs and charging) was 35% dollars in a single funding round, such as Hozon Automobile of this, its share was much lower than in recent years. Time will tell (USD 450 million) and Enovate Motors (USD 300 million). However, whether this represents consolidation at the end of a period of European and US early-stage VC deal sizes are also at all-time highs. exuberance marking the start of EV deployment. Other sectors grew This indicates investor confidence in new energy technologies to play a significantly, notably energy storage, hydrogen and fuel cells, but also disruptive and profitable role in the energy sector in the next decade. bioenergy and solar. Combined, they largely offset the USD 1.5 billion While diversification of sectors and geography, plus rising deal value, decline in transport. Higher levels of growth equity, despite lower were good-news stories for 2019, the near-term outlook is very follow-on deals, provide another indication that investors see storage different. Early-stage energy VC deals were still on a par with 2018-19 and hydrogen as having high growth potential. Notable start-ups levels in Q1 2020, but lower activity was evident in China and global completing funding rounds included energy storage company Energy declines are expected in Q2-4 due to financial risks, working restrictions Vault (USD 110 million), biomethane producer Bioenergy DevCo and policy uncertainty. When including later-stage deals such as (USD 106 million), Jiangsu Guofu Hydrogen (USD 60 million) and battery growth equity, which tend to be larger, Q1 2020 activity was 50% lower pack maker Romeo Power (USD 88 million). Among the deals for than in recent years. Some countries have already included support for hydrogen technologies, most were for firms with novel hydrogen start-ups in stimulus announcements, including France and the United production devices, such as pressurised or photocatalytic electrolysers.

Kingdom.

Page | 189 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

Corporate investment in energy start-ups is still led by digital firms, but with a larger role for car companies. Sources of VC funding are slowly diversifying geographically.

Corporate venture capital and growth equity by sector of investor (left) and share of domestic investors in countries’ VC activity (right) 6 100%

5 80%

4 60%

USD billion USD (2019) 3 40% 2

20% 1

2010 2012 2014 2016 2018 2010-13 2014-17 2018-19

Oil, gas and coal Utilities and IPPs Energy equipment and services Batteries China United States Europe ICT and electronics Transport Israel India Australia Other IEA 2020. All rights reserved. Notes: ICT = information and communication technology; IPPs = independent power producers. “Other” includes all non-stated sectors, among others real estate, hospitality and health. Deals types include grant, seed, series A, series B, growth equity, private investment in public equity, coin/token offering and late-stage private equity. Unless otherwise stated, deal value is shared equally among multiple investors in a single deal. Energy technology companies are defined as per the previous chart. Sources: IEA calculations based on Cleantech Group (2020).

Page | 190 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

The globalisation of energy technology VC indicates a maturing sector with corporate and financial investors alike seeking opportunities in funding the best start-ups around the world

Corporate investments in energy technology start-ups, including corporate investors, of which USD 1 billion came from the transport corporate venture capital, reached a new high in 2019, at around sector and USD 1.8 billion from the ICT sector. Electric pickup truck USD 5 billion. The strong annual increase was driven by a small number producer Rivian raised over USD 3 billion in 2019 from investors of very large growth-equity rounds, notably in low-carbon transport. including Ford Motor Company and Amazon. Electric vehicle Large corporations continue to see a strategic case for direct manufacturer Weltmeister Motor secured USD 450 million in a growth- investment in innovative, nimble technology players. Companies inside equity deal led by ICT company Baidu. and outside the energy sector are using corporate VC as part of a A country’s VC landscape is defined by its investors as well as its start- flexible and open energy innovation strategy. ups. For example, four-fifths of the investment in US-based start-ups Traditional energy actors (i.e. fossil fuels, utilities, IPPs, energy comes from US investors. This share has declined slightly in recent equipment and services) account for a decreasing share of years, but not as steeply as the share of investment received by Europe- investments; about 23% in 2016-19 compared with 49% over 2012 to based start-ups from Europe-based investors. That share is now closer 2015. The notable spending by electrical equipment manufacturers in to 70%, similar to that of China, which has dipped from over 90% since electricity storage and EVs, which drove the trend in 2018, was absent. the middle of the last decade. Oil and gas companies accounted for roughly 50% of investments by While most governments seek to keep the domestic gains from traditional energy actors but at USD 290 million, their spending was less innovation, there are also benefits to attracting overseas finance to than in 2017 and 2018. Deals involved start-ups in bioenergy (e.g. Shell local start-ups. World-class start-ups attract investment from all over investing in Punjab Renewable Energy Systems), CCUS (Chevron in the world and many VC funds scour the globe for talent. Corporate VC, Carbon Engineering), energy storage (Eni in Form Energy), hydrogen particularly from multinationals, tends to have a global scope because it (Total in Sunfire) and solar (Equinor in Yellow Door Energy and Oxford seeks opportunities with the best business fit, and often with local PV). market knowledge. The rising share of inward VC in China, Europe and Conversely, the share of non-traditional actors in corporate investments the United States may indicate a more globalised and efficient for energy start-ups rose again. The strong investment presence of the environment for energy technology entrepreneur finance. Investment ICT and electronics sectors since the mid-2010s was maintained with in start-ups from Australia, India and Israel comes largely from overseas, nearly USD 2 billion in 2019, mostly in low-carbon transport, energy reflecting the ability of their entrepreneurs to compete for capital given storage and efficiency, including for data centres. their relatively smaller domestic VC sectors. Of the nearly USD 5.9 billion of VC and other equity invested in low- carbon transport start-ups in 2019 in total, USD 3 billion was from

Page | 191 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

A record capacity of electrolysers to produce hydrogen was added in 2019, supported by vehicles in Europe and industry in China, with a far bigger wave of projects on its way

Capacity of electrolysers for hydrogen production by commissioning year, by intended use of hydrogen (left) and geography (right)

By intended use of hydrogen By geography 150 150 MWe Planned installations as of the start of 2020 125 125

100 100

75 75

50 50

25 25 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020* 2020*

Vehicles Industrial applications China North America Europe Gas grid blending Electricity storage Japan Rest of World Hydrogen-based synthetic fuels Other IEA 2020. All rights reserved. Notes: 2020 values represent estimates based on successful completion of all projects publicly stating a 2020 commissioning data as of the start of 2020.

MWe = megawatts of electricity input; in some cases this is calculated from hydrogen output volumes if otherwise not stated. Includes electrolysers for the supply of hydrogen for energy purposes or as an alternative to fossil fuels in industry, such as chemical production and oil refining. Source: IEA (2020i).

Page | 192 IEA. All reserved. rights World Energy Investment 2020 R&D and technology innovation

But with demand concentrated in hard-hit sectors, a planned 2020 surge faces new challenges

In recent years, capacity additions of water electrolysers to produce among others, may all review the economics of electrolysis hydrogen hydrogen have expanded rapidly, from 2 MWe in 2010 to 25 MWe in applications in light of weaker revenues and lower coal and gas prices. 2019. This activity reflects surging interest in hydrogen as an alternative To date, much demand for electrolysis hydrogen – some two to five to fossil fuels in a diverse range of uses, from powering vehicles to times more expensive than that from fossil fuels today – has been storing electricity, refining oil, heating homes, and producing synthetic supported by one-off government initiatives. Project developers expect fuels such as methane or ammonia. more predictable demand ahead, arising from industrial emissions Electrolysers use electricity to split water into oxygen and hydrogen, reduction commitments (e.g. by oil refiners), and policy incentives that which generates no CO2 emissions at the point of use. The powering of promote clean hydrogen. These factors depend on the evolution of the electrolysers by low-carbon electricity or applying CCUS to hydrogen current downturn, as well as government efforts to include in stimulus production from fossil fuels can support low-carbon hydrogen at the measures policies that support demand and supply of hydrogen. In this point of production. No new CCUS-equipped hydrogen production – light, the vehicles sector has been the most dynamic route for each plant equivalent to 100 MWe to 600 MWe of electrolysers – has hydrogen uptake, based often on hydrogen from natural gas or coal been added since 2016 but several are planned, mostly in Europe. without CCUS. At the end of 2019, 23 350 fuel-cell electric vehicles (FCEVs) were on the road, nearly half registered in 2019 alone, while Investment has surged in the past two years. Electrolysers installed in hydrogen refuelling stations increased by 20% to 460. Most activity has 2019 represent capital expenditure of around USD 40 million, while come in Japan and the United States. While blending hydrogen into the those in construction may be worth over ten times more. Electrolysers gas grid, to deliver low-carbon heat for buildings, is also mentioned in have grown in scale, from below 0.5 MW on average in 2010 to 6 MW e e, policy debates (see Energy End Use and Efficiency section), just and quoted costs for newer designs have halved. A 10 MWe facility 0.6 MWel was added for this dedicated purpose in 2019 and 2020. began operation in Japan in March, and a 20 MWe plant is in construction in Canada, both for vehicles, and potentially industrial China represents a major new factor in the development of hydrogen. uses too. Several hundred MWe of announced projects seek financial From minimal levels in 2018, China is aiming for around 150 MWe in close this year or next; over 600 MWe could be commissioned through operation by 2021, mostly for mobility, with increased signs of public 2021, nearly three times the total additions since 2010. Two electrolyser support. In April 2020, Hebei province approved USD 1.2 billion of factories, 1 GWe and 360 MWe, are in construction in the United projects for hydrogen equipment manufacturing, filling stations, fuel Kingdom and Norway, with others under development in China. cells and hydrogen production, including electrolysis (Xu and Singh, 2020). Sales of FCEVs climbed from a few units in 2017 to almost 4 400 However, many of these investments could face delays related to in 2019; China now leads hydrogen bus and truck deployment. Covid-19 restrictions, revised capital expenditure plans and weaker hydrogen demand. The automotive, oil and gas, and steel industries,

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Will industrial policy help spur venture capital for hydrogen and speed commercialisation?

The landscape of hydrogen technologies and companies is in flux. Largest early-stage VC deals in hydrogen start-ups in 2019

Industrial uses and the gas grid are becoming more important target Company Offering USD million Country markets, China is playing a larger role in technology development, and there is not yet a dominant technology design. Jiangsu Guofu Electrolyser, storage, vehicle Hydrogen 60 China refuelling Several countries seek to become technology leaders in hydrogen Technology and are developing policies and financial measures to support strategic investment. This is reflected in the diversity of countries Ergosup Electrolyser 12.5 France from which the hydrogen start-ups attracting most early-stage VC come. Joi Scientific Hydrogen production 9.8 United States

In addition to a push in China, the Netherlands published a Climate Szygygy Hydrogen production from United States 9.74 Act in 2019 with specific hydrogen targets and, in May 2020, the Plasmonics natural gas or ammonia (2 deals) Australian government announced up to USD 200 million for a new hydrogen fund (CEFC, 2020). A number of countries, including Enapter Electrolyser 4.65 Germany Portugal, have indicated possible support for hydrogen as part of economic recovery measures, while Germany’s national strategy was Log 9 Materials Vehicle fuel cell 3.5 India delayed to accommodate the new economic context. Largest growth equity deals in hydrogen firms in 2019 In 2019, there were more early-stage VC deals for hydrogen start-ups than in any previous year, with over USD 110 million invested in Company Offering USD million Country 25 deals. The largest deals were for hydrogen production systems, especially novel technologies, including pressurised electrolysers, Nikola Motors Vehicle 250 United States saltwater splitting, anion electrolyte membranes and photocatalytic Electrolyser, stationary fuel Sunfire 28.7 Germany reactors. Few of these firms are proposing the current market-leading cell technology of alkaline electrolysers, or the more expensive, more flexible challenger polymer electrolyte membrane electrolysers, FirstElement Fuel Vehicle refuelling network 24 United States which are popular for new demonstration projects. This shows that Hydrogenious competition between electrolyser technologies is not yet settled. Hydrogen storage 18.8 Germany LOHC Among growth equity deals, which tend to involve less technology innovation risk, mobility was a key target market in 2019.

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While CCUS investment was modest in 2019, new announcements emerged from the United States, where 15 projects seek to enter construction by 2024 to qualify for the 45Q tax credit

Total capacities of 15 announced US CO2 capture projects targeting final investment decision by the end of 2023

Coal Natural gas

Power Chemicals Ammonia Cement Industry Bioethanol DAC Biomass gasification Bioenergy or DAC

Fossil fuel processing

5 10 15 20 25

Notes: DAC = direct air capture. Projects considering multiple CO2 sources have been allocated to specific categories based on known local CO2 sources or on an equal basis in other cases.

Sources: calculations based on GCCSI (2020) and company announcements.

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80% of these projects plan to sell the captured CO2 to the oil industry for storage via enhanced oil recovery, but the current market turmoil could threaten their timelines

Capital spending on CCUS projects remained modest in 2019, at under Alongside 45Q, California’s Low Carbon Fuel Standard (LCFS) has USD 1 billion, mostly on projects that have been under development for emerged as a key complementary policy for projects linked to biofuels several years. The first two CCUS trains of the Gorgon LNG project in production, DAC or EOR. Globally, 45Q and LCFS are trailblazers for Australia began operation, following delays since construction began in DAC support. The 2019 CCUS protocol clarifies how projects can

2009. It is now the world’s largest dedicated geological CO2 storage benefit from LCFS credits – which traded at around USD 180 per tonne facility (i.e. the CO2 is not used for enhanced oil recovery [EOR]). It will of CO2 in 2019 – and requires monitoring of stored CO2 for 100 years. be able to store 4 Mt of CO per year when the third train starts, which 2 Among projects targeting 45Q support, some of the closest to is due in 2020, and if the LNG plant runs at full capacity. Four other investment decision and operation are those that aim to capture high- CCUS projects are in construction, two in Canada and two in China. purity CO that is currently vented from bioethanol production or While no FIDs have been taken since 2017, in 2020 three oil and gas 2 natural gas processing. These are among the lowest-cost options for firms stated a willingness to invest USD 700 million to develop CO 2 capturing CO and the projects plan to pair this with EOR, which can be storage in Norway by 2024, pending public funding (Equinor, 2020). 2 the CO2 storage option that is quickest to bring into operation. It often Investment signals for CCUS in the United States improved following requires only a connecting pipeline to an existing EOR operation. the extension and reform of the 45Q tax credit in 2017. Companies have However, the current oil price downturn and sharp cuts to upstream since been waiting for regulatory clarification before committing to investment programmes suggest EOR operators may be reluctant to building, and some of this – on construction criteria – was published in sign new contracts (see Fuel Supply section). Project sponsors such as early 2020. Fifteen projects are now reportedly targeting 45Q support, ExxonMobil and Occidental Petroleum have cut capital budgets by over pushing the global number of large-scale projects in development over 30% in 2020. While some discussion of an extension of the 45Q 30, the highest since 2014. Depending on the size and sector, each deadline (beyond 2024) and increasing the value of credits emerged project could invest USD 100 million to USD 1 000 million if successful. before the crisis, no decisions have been made to adjust the policy. Section 45Q of the US tax code provides up to USD 50 (inflation The largest US announcements are associated with coal and natural adjusted) per tonne of CO sent to geological storage, or up to 2 gas-fired power plants, with CO capture capacities of 1 Mt to 6 Mt per USD 35 per tonne used for EOR, for up to 12 years, if the effectiveness 2 year. Several of these projects are looking to sell the CO for EOR. Given of storage is monitored and construction begins by 1 January 2024. Like 2 the likely challenges to securing CO off-take contracts over the coming other production-based incentives, 45Q incentivises investors to 2 two and a half years, dedicated geological CO storage options may identify cost-effective projects developed by any promoter, though the 2 become more attractive than before. credit is best monetised by bigger players with larger tax burdens.

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Annex

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Andreas Schroeder); the Energy Efficiency Division (Brian Motherway, Acknowledgements Kevin Lane, Yannick Monschauer, Hugo Salamanca); the Energy Environment Division (Samantha McCulloch); the Energy Technology This report was prepared by the investment team in the Energy Policy Division (Timur Gül, Araceli Fernandez Pales, Thibault Abergel, Supply and Investment Outlook (ESIO) Division of the Directorate of José Miguel Bermudez Menedez, Marine Gorner); and the Renewable Sustainability, Technology and Outlooks (STO). The report was Energy Division (Paolo Frankl, Heymi Bahar, Yasmina Abdelilah, Piotr designed and directed by Michael Waldron (lead on energy financing Bojek, Hideki Kamitatara, Pharoah Le Feuvre, Grecia Rodriguez). and funding). The principal authors and contributors were Lucila Arboleya (lead on power sector; emerging economies); Simon Bennett The report also benefited from valuable inputs, comments and (lead on end use and efficiency, and R&D and technology innovation); feedback from other experts within the IEA and the OECD, including Pablo Gonzalez (power generation, networks & storage); Tim Gould Mechthild Wörsdörfer (Director of Sustainability, Technology and (lead on fuel supply); Yoko Nobuoka (fuel supply, financing and Outlooks), Keisuke Sadamori (Director of Energy Markets and funding); Pawel Olejarnik (modelling and data across sectors); Ryszard Security), Laszlo Varro (Chief Economist), Ali Al-Saffar, Neil Atkinson, Pospiech (modelling and data across sectors, ownership); Rebecca Sylvia Beyer, Toril Bosoni, Chiara Delmastro, Jean Baptiste Dubreuil, Schulz (fuel supply, financing and funding). Tim Gould, Head of Peter Fraser, Astha Gupta, Edwin Haesen, Tomasz Kozluk, Simone Energy Supply and Investment Outlook Division, provided valuable Landolina, Rui Luo, Jad Mouawad, Alan Searl, Masatoshi Sugiura, and guidance and led on the overview. Eleni Tsoukala provided essential Tomoko Uesawa. support. Thanks also to Jad Mouawad, Jon Custer, Astrid Dumond, Merve

Erdem, Chris Gully, Katie Lazaro, Jethro Mullen, Isabelle Nonain- The report benefited greatly from contributions from other experts Semelin, Julie Puech, Rob Stone and Therese Walsh of the within the IEA: Alessandro Blasi provided valuable advice and support Communications and Digital Office. Erin Crum edited the manuscript. throughout the project, as did Carlos Fernandez Alvarez (coal), Carla Benauges (power, financing), Ian Hamilton (buildings efficiency), Tae- We would like to thank the following organisations that gave their time Yoon Kim (refining and petrochemicals), Jean-Baptiste Le Marois (R&D to answer questions on different parts of the energy investment value and innovation), Leonardo Paoli (EVs), Apostolos Petropoulos (SUVs), chain: Apicorp, Baker Hughes, BNP Asset Management, DBS Bank, Alison Pridmore (transport, efficiency), Giulia Ragosa (ESCOs) and DWS Group, Engie, Eni, Euroheat, GE, Goldman Sachs, Hess Peter Zeniewski (LNG). Corporation, HSBC, IMF, Meridiam, Mirova, Modec, Morgan Stanley, Nomadia Energy, Ørsted, Schlumberger, Sembcorp, Shell, SPV Market The report is indebted to the high calibre of advice, data and support Research, TOTAL. provided by other colleagues in the ESIO Division (Christophe McGlade); the Energy Data Centre (Roberta Quadrelli, Domenico Lattanzio); the Energy Demand Outlook Division (Laura Cozzi, Brent Wanner, Yasmine Arsalane, Davide D’Ambrosio, Timothy Goodson,

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Many experts from outside of the IEA provided input, commented on Akito Matsumoto International Monetary Fund the underlying analytical work, and reviewed the report. Their Antonio Merino Garcia Repsol comments and suggestions were of great value. They include: Vincent Minier Schneider Electric Nadia Ameli UCL Institute for Sustainable Resources Steve Nadel The American Council for an Energy-Efficient Manuel Baritaud European Investment Bank Economy Leila Benali Apicorp Janvier Nkurunziza United Nations Conference on Trade and Kamel Bennaceur Nomadia Energy Development (UNCTAD) Louis Brasington Group Andrea Pescatori International Monetary Fund Mick Buffier Glencore Davide Puglielli Enel Kanika Chawla Council on Energy, Environment and Water Olivier Racle Engie Zuzana Dobrotkova World Bank Sanjoy Rajan European Investment Bank Jennie Dodson UK International Energy Innovation Strategy, Filip Schittecatte ExxonMobil BEIS Karl Schoensteiner Siemens Charles Donovan Imperial College Marco Stella TFS Green Bärbel Epp Solrico Ottavia Stella ENI Charles Esser Council of European Energy Regulators Ulrik Straedbaek Ørsted Nathan Frisbee Schlumberger Michael Taylor IRENA Benjamin Guin Bank of England Wim Thomas Shell Katarina Kristiansen Danish District Heating Association Julien Touati Meridiam Francisco Laveron Iberdrola Paul Voss Euroheat & Power Alexandre Liebermann Total

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Andrew Walker Cheniere

Yali Wang International Institute of Green Finance

Graham Weale Ruhr University Bochum

Paul Welford Hess Corporation

Kelvin Wong DBS Bank

Akira Yabumoto J-Power

Shinichi Yasuda Development Bank of Japan

William Zimmern BP

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The IEA examines the full spectrum of IEA member countries: Spain energy issues including oil, gas and Australia Sweden coal supply and demand, renewable Austria Switzerland energy technologies, electricity Belgium Turkey markets, energy efficiency, access to Canada United Kingdom energy, demand side management Czech Republic United States and much more. Through its work, the Denmark IEA advocates policies that will Estonia IEA association countries: enhance the reliability, affordability Finland Brazil and sustainability of energy in its 30 France China member countries, 8 association Germany India countries and beyond. Greece Indonesia Hungary Morocco Ireland Singapore Italy South Africa Japan Thailand Korea Please note that this publication is Luxembourg subject to specific restrictions that limit Mexico its use and distribution. The terms and Netherlands conditions are available online at New Zealand www.iea.org/t&c/ Norway Poland Source: IEA. All rights reserved. Portugal International Energy Agency Slovak Republic Website: www.iea.org Cover Typeset necessarily r publication This territory, c f international sta the publicationThis a t and figures U publication. p the make Al IEA. i Contact Website: w International E P IEA shalland n ublications i ublication’s contents (including r s no l r design: o tus of r ights i n nformation: www.iea.org/about/contact ity o ot ber F epresentation o ww.iea.org r rance by eflect f is derived ables rontier nless otherwise i nless r so nergy A IEA eserved r area. eflec esponsible f m any nd vereignty o t hos s and b I EA EA gency vi ts the . e of – r w 2020 May a i tot and oundaries ndividual p include te any ver or a I rom e arranty, t of ews m all ndicated, ny u d EA d herein a se of accuracy) or ts completeness I I he EA EA member d tothe rritory, i or xpress a and ata S EA , orr p aterial o name he ecretariat but does not not does but ecretariat eliance on w re nalysis. i mplied, c prejudiceithout to ountries. resented i elimitation o f a , t n r ny he of espect T he IEA he n f